Experts Talk Fedspeak, Inflation, Jobless Claims

What Wall Street economists and strategists had to say about key developments on May 13

By Businessweek.com Staff

Businessweek.com compiles comments from Wall Street economists and strategists on the key economic and market topics of May 13.

Peter Newland, Barclays Capital

Fed Vice-Chairman [Donald] Kohn provided a robust defense of the "extended period" language and the Fed's asset purchase program. However, he was careful to stress that "firmly anchored inflation expectations are essential to successful monetary policy," highlighting that the linkage between the Fed's actions and inflation expectations remains "unsettled" and that the Fed will "need to watch and study [possible effects on inflation expectations] carefully." On the language in recent FOMC minutes, he said, "by noting that the federal funds rate was likely to remain at 'exceptionally low' levels for an 'extended period,' the FOMC likely was able to keep long-term interest rates lower than would otherwise have been the case."

On asset purchases, he said, "large-scale asset purchases at the zero bound do help to ease financial conditions." Kohn added that his "presumption" was that this effect came mainly from the stock rather than from the flow of purchases. He cited the muted impact on mortgage markets to the end of the Fed's MBS purchase program as supporting evidence.

On the large amount of bank reserves that resulted from the asset purchases, Kohn said that the ex ante view that these "would be unlikely to have a significant independent effect on financial markets and the economy" had proved accurate so far, pointing to elevated lending rates, the declining quantity of bank loans, and weak growth in the money supply. [Still], in a forward-looking sense, Kohn struck a more cautious note, saying "the portfolio behavior of banks might shift as the economy and confidence recover" and "we need to be alert to the risk that households, businesses, and investors could begin to expect higher inflation based partly on the expanded balance sheet."

Tim Quinlan, Wells Fargo

Import prices climbed 0.9 percent in April, the eighth monthly increase in nine months. Petroleum costs jumped 3.3 percent, along with a 2.4 percent jump in industrial supply prices, as global economic recovery has spurred demand for input materials for manufacturing. The prices for U.S. goods abroad are rising as well. Total export prices climbed 1.2 percent, with the biggest gain in industrial supplies.

Total import prices are too heavily influenced by oil and oil-related price swings to tell us much about core [excluding food and energy prices] inflation. Still, non-oil import prices are rising fast as well. While we do not expect the core rate of inflation to climb above 2 percent in the next two years, the ongoing global recovery is clearly creating demand for commodities and driving up prices. Core PPI [producer price index] tends to react to big moves in non-oil import prices.

David Resler, Nomura Securities

Initial jobless claims declined to 444,000 in the week ending May 8 from an upward revised 448,000 (from 444,000) the previous week. Although initial claims were a bit higher than "expected" (those expectations reflect mainly an extrapolation from recent trends rather than a data-based forecast), the number of claims filed is the third-lowest since the [September 2008] Lehman bankruptcy filing. The four-week average fell to 451,000, the second-lowest since the recession intensified in late 2008, while the eight-week average continued its slow but steady descent to 454,000, the lowest since the week of Sept. 26, 2008.

While the downtrend in claims continues, the number of workers continuing to collect benefits rose by 12,000 in the week ending May 1, after three straight weeks of decline. The total number of persons receiving unemployment insurance benefits—"continuing claims" plus those on the emergency/extended benefit rolls—fell to about 10.0 million from 10.2 million in the previous week. The unemployment rate among insured workers held steady at 3.6 percent for the fifth straight week.

As we have noted earlier, we believe the current level of claims is consistent with positive private sector job growth.

Hans Mikkelsen and Yuriy Shchuchinov, Bank of America Merrill Lynch

Financial markets seem to have recovered quickly from the sovereign crisis, as highlighted by the return to steady increases in stock prices and credit spreads [on May 12]. The euro remains the main casualty of the crisis, and if the weakness continues a stronger dollar could adversely affect U.S. corporate profits through competitiveness and the currency translation of foreign profits. For companies in the U.S. high-grade corporate bond market, on average 27 percent of sales come from foreign sources.

However, sectors with most foreign currency exposure, such as Chemicals, Technology, and Industrial Products, are trading at tight spread levels. What this means is that companies in these sectors tend to have low leverage, and thus changes in earnings accrue mostly to shareholders with little effect on credit spreads. On the other hand, credit sectors with wider spreads—that are more sensitive to earnings—tend to have relatively lower proportions of foreign sales. Thus we estimate that currency fluctuations have relatively little effect on U.S. high-grade corporate credit (except of course in Oil & Gas and Pipelines via the effect on oil prices).

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