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Weekly Economic Commentary


Jobless Claims – Labor Market Improvement Continues

March 15, 2012

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Initial jobless claims fell 14,000 to 351,000 during the week ended March 10. The four-week moving average at 355,750 is the lowest in nearly four years. Continuing claims, which lag initial jobless claims by one week, declined 81,000 to 3.343 million, the lowest since August 2008. The main message is the labor market conditions are improving at an impressive pace.

DEC 3/15/2012 Chart 1

Higher Energy Prices Lift Producer Price Index

The Producer Price Index (PPI) rose 0.4% in February after a 0.1% increase in the prior month. The 1.3% gain in the energy price index was led by a 4.3% jump in gasoline prices. The food price index slipped 0.1%, marking the third consecutive monthly decline. Excluding food and energy, the core PPI advanced 0.2% during February vs. a 0.4% increase in January. The year-to-year change in the overall PPI shows a decelerating trend, while the core PPI appears to have stabilized at 3.0%.

DEC 3/15/2012 Chart 2

In the last three months, the core PPI and core intermediate PPI show price pressures. It is unclear if this is a temporary or more lasting trend.

DEC 3/15/2012 Chart 3

DEC 3/15/2012 Table 1

Lesson from Tracking the 10-Treasury Note Yield

The 10-year U.S Treasury note yield is trading at 2.28% as of this writing, little changed from 2.29% yesterday. But, this is a 25 bps uptick in two trading days, given the March 12 closing quote of 2.04%. The reasons listed for the sharp sell-off are – the less dovish policy statement of the Fed, February retail sales numbers, the success of the stress test of the largest 19 banks of the nation, the resolution of the Greek debt crisis, the improvement of employment conditions seen in the February employment report, the optimism from equity price rally, and so forth. The main takeaway is that as the list of positive economic signals grows, long rates move up in a hurry.

DEC 3/15/2012 Chart 4

The Fed is not in a monetary policy tightening mode at present and U.S. and global economic conditions are different from the 1994-95 period. Nonetheless, the key lesson from the 1994-1995 monetary policy tightening experience is that interest rate move up rapidly as the economy gathers steam. In October 1993, the 10-year Treasury note hit a low of 5.19%, which rose to a high of 8.05% by early November (see Chart 5). The Fed commenced tightening in February 1994 when the 10-year Treasury note was trading at 5.94% and raised the target federal funds rate to 5.50% by November 15, 1994.

DEC 3/15/2012 Chart 5

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.