Warsh wanted clarity and the data delivered complexity: price pressures building in factories, hiring still hesitant, and forward-looking indicators drawing strength from Wall Street rather than Main Street.
A day after the Federal Reserve delivered a notably hawkish signal, the U.S. economy handed Kevin Warsh a complicated first test. Weekly jobless claims came in slightly above expectations, the Conference Board's leading index pointed to continued fragility, and Philadelphia-area manufacturing offered only a modest bounce — a data cocktail that sits uneasily alongside the dot plot that sent markets scrambling to price in rate hikes as soon as July.
Warsh, who declined to offer his own rate projections at Wednesday's press conference,made clear the incoming data would do the talking. "The more that markets are paying attention to what's happening in the real economy," he said, "the more financial markets can price what they believe is the most likely and what are the tail risks."
Thursday's Data a Problem for the Fed, or a Gift for Its New Chairman?
The data does not contradict the Fed's hawkish message. Rather, it reinforces Warsh's data-dependent approach. While it modestly weakens the case for another rate hike, it does not rule one out.
What the data says:
Jobless claims: Initial claims edged down 4,000 week-over-week to 226,000 in the second week of June. The reading is still above the 225,000 market expectation and firmly above levels consistent with a tightening labor market.
Philly Fed: Forecast at 9.8 vs a prior reading of -0.4, the Philadelphia Fed’s diffusion index of business activity climbed to a better-than-expected 10.3 in June. The futures business activity index edged down 3 points but stayed at a robust 50.2. More importantly, the employment index climbed to the highest level since January by virtue of a 11-point surge to 7.9.
The prices component was supportive of the Fed’s stance. The prices paid index rose 5 points to 53.2, and the prices received index (20.3), though dropping 6 points to the lowest level since February, was still elevated relative to its long-term average.
Conference Board LEI: The leading economic index (LEI) rose just 0.1% in May, slower than the upwardly revised 0.2% increase in the previous month. The index, however, came in line with the consensus expectation. A sore point: much of the upside came from financial variables, namely stock prices and interest rate spreads, rather than real economic activity, raising questions about how durable even this modest improvement is.
The July meeting is now a live question, and the data is unlikely to settle it. A labor marketthat remains broadly healthy but is beginning to show signs of softening at the margins, a manufacturing sector where price pressures are heating up again, and a leading index that draws much of its strength from financial markets rather than factory floors — this is not a clean mandate for anything.Warsh wanted the data to do the talking. On Thursday, it spoke in three directions at once.