US jobless claims/inflation a ringing endorsement to September Fed tapering

FXstreet.com (New York) - With the September Fed meeting drawing nearer, every US jobs report and economic indicator will be under the microscope. One such release was reported earlier today, with Initial Jobless Claims falling to a fresh six-year low last week, coupled with consumer prices that rose broadly in July. This certainly is viewed as welcome news for the Federal Reserve, already inching closer to trimming its massive bond-buying program.

Labor market in focus

Indeed, the slightly upbeat picture of the labor market revealed pockets of pricing power in the sluggish economy, however U.S. stock indices and prices for U.S. Treasury debt fell across the board, which was viewed as an increasing endorsement and likelihood of the Fed tapering its purchases in September.

"The data continues to improve and impress the marketplace and I think the data will continue in this direction. Then the question becomes not whether they are tapering in September, but how much," suggests Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia.

Initial claims for state unemployment benefits dropped 15,000 to a seasonally adjusted 320,000, the lowest level since October 2007, the Labor Department said. On a larger timeframe, the four-week moving average for new claims, which irons out week-to-week volatility, fell 4,000 to 332,000, the lowest level since November 2007, another rallying point for Fed action.

Rising CPI on point with Fed expectations

With employment firmly in tow, the Labor Department also revealed that the Consumer Price Index rose +0.2% (up from +1.8% previously) as the cost of goods and services ranging from tobacco to apparel and food increased –the CPI had already increased 0.5% in June, though it is worth noting that July's increase in consumer inflation was exactly in line with economists' expectations. In the 12 months through July, the CPI advanced +2.0%, the largest increase since February, after increasing +1.8% in June.

The push in inflation to the Fed's 2% target could offer some comfort to some central bank officials who have warned on the potential dangers of inflation running near historic lows. The uptick in prices certainly fits in with Fed Chairman Ben Bernanke's views that the low inflation was temporary. The U.S. central bank has said it plans to start trimming the $85 billion in bonds it is purchasing each month to keep borrowing costs low later this year.

Impact on FX markets

Indeed, most economists anticipate the Fed will make an announcement after its policy meeting in September on the future of the bond-purchasing program, a potentially explosive and incendiary event that could trigger repercussions for FX markets.