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Conclusion: The economic data out today continues to support our key theme of Jobless Stagflation.  The inflation component should continue to keep the Fed in a box at least through year-end.


Positions: Long FLAT, SLV, LQD, FXC, and CAF; Short FXE, SHY, EWJ, and EWU.


Given the market action today, it is obviously not a day to pile on with bad news, but we do think it is important to synthesize some of the key economic data points out today and their prospective implications.  The theme of Jobless Stagflation is one we’ve been reiterating consistently over the past 9+ months.  As we review the economic data out today, this theme continues to be supported in spades.

Consumer price index – The all-items CPI index came in at +3.6% on a year-over-year basis.  The primary positive contributor, not surprisingly, was fuel oil up +37.2% in price year-over-year.  Interestingly, the most significant negative contributor was utility gas service, which was down -2.8% on a year-over-year basis.  This is the third month in a row that all-items CPI has increased 3.6% year-over-year, which is the highest level since November 2008.

The Federal Reserve tends to focus on CPI ex-food and energy, due to the purported transitory nature of commodity prices.  On this basis, CPI is still accelerating and came in at 1.8% for the month of July.  Further, CPI ex-food and energy has been accelerating since a 0.6% print in October 2010 and is now back to levels not seen since December 2009.

In aggregate, CPI readings should continue to keep the Federal Reserve in a box as it relates to implementing incremental easing.  Further, comparisons for CPI are relatively easy through the end of 2011, which will likely keep CPI at elevated levels.

Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 1

Jobless claims – The jobless claim number of 408K today was not a disaster per se, but did come in above the critical 400K line and accelerated from the prior week’s reading of 399K.  Above 400K, based on the math, the unemployment rate will not approve.  Since the beginning of April, we have seen only two weeks with jobless claims below 400K, which highlights the structural and sticky nature of the domestic unemployment picture.

Prospectively, we expect the employment picture in the U.S. to deteriorate based on a number leading indicators.  One key leading indicator that our Financials Team flagged today is Challenger Announced Job Cuts, which jumped 59% year-over-year in July to 66.4K. This is an 18-month high and should be reflected in government reported numbers in the coming weeks.  Another interesting leading indicator is sentiment, which is reflected in manufacturing surveys as highlighted in the Philadelphia Fed Factory Index today, and touched on below.

Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 2

Philly Fed survey – To say today’s Philadelphia Fed’s Factory index survey was a bomb would be an understatement.  The index dropped to -30.7 from +3.2 the month before, and came in well below the consensus economists’ expectations of +3.7.   This was the largest month-over-month drop since October 2008, which was in the midst of the financial crisis.   Some of the key components of the survey to highlight include: new orders falling to -26.8 from +0.1 and the gauge of the number of employees falling from +8.8 to -5.2.

Obviously all economic indicators are correlated on some level, but in the chart below we compared Philly Fed Survey to monthly nonfarm payrolls.  Not surprisingly, as the chart below shows, the two series of data are correlated.   In the table below, we looked at the more direct correlation, so when the Philly Fed hits -20 for the first time in a cycle, what does that imply for nonfarm payrolls in the next month?  As the table shows, when nonfarm payrolls hit -20 for the first time in a series (a positive number would reset the series), on average the next month of nonfarm payrolls is -71.4.

Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 3

Obviously, much of this data is priced with the market action today, but collectively the data continues to support the Jobless Stagflation theme. 

Daryl G. Jones

Director of Research

Inflation?  Deflation?  Reflation?  Nope, Jobless Stagflation - 4