It’s been all downhill on Wall Street since the S&P 500 closed at a record high on Monday, with the Dow today tumbling by a triple-digit number of points, adding to yesterday’s large losses.
This week’s fall in stock prices represents investors recalibrating their outlook for when the Fed will begin to trim its monetary stimulus, with the previously outside chance of a December taper now being considered more probable in lieu of the strength of the latest economic data.
That line of thinking has benefitted the US dollar today, with the dollar index rising 0.42%. The dollar has advanced against all major currencies, most notably the Australian dollar: AUD/USD was off by 1.3% by early afternoon in New York.
Today’s data was not entirely unambiguous, with upbeat retail sales weighing in the favour of an earlier taper from the Fed, offset to some degree by cooling import prices and a spike in jobless claims last week.
Retail sales increased by 0.7% last month, topping the average forecast of analysts polled by Reuters, in a positive sign for both the holiday shopping season and GDP growth in the current quarter.
Jobless claims jumped to 368,000, up from 300,000 in the previous week. This was massive increase, but the holiday period may possibly be warping this report. After several weeks of steady improvements, this now takes initial claims back to the levels we were seeing in October. Overall there is little doubt that we’ve been seeing advances in the jobs market, but my view is that this little fillip in the number of claims may just be enough to convince the Fed to adopt a wait and see attitude.
Import prices dropped 0.6% in November, matching the size of drop seen in October. Year-on-year import prices are 1.5% lower and I would think this means we are unlikely to see the CPI level moving up next week. Below-target inflation has been acknowledged by the Fed as posing a threat to economic growth and until recently I would have said that the depressed level of inflation is a blocker in the way of the Fed introducing a taper. Given comments from James Bullard of the St Louis Fed earlier this week though, in which he suggested the Fed could make a token taper and pause in subsequent months to see how inflation pans out, I’m no longer quite as convinced.