What’s the Story

by CC September 13, 2012 9:08 am • Commentary


The number of Americans filing new claims for jobless benefits rose more than expected last week, with several states reporting an increase related to Tropical Storm Isaac.

Initial claims for state unemployment benefits rose 15,000 to a seasonally adjusted 382,000, the highest in two months, the Labor Department said on Thursday. The prior week’s figure was revised up to show 2,000 more applications than previously reported.

Economists polled by Reuters had forecast claims rising to 370,000 last week.

A Labor Department official said Tropical Storm Isaac, which drenched parts of the country, accounted for about 9,000 of the claims filed last week. The number is unadjusted.

But even accounting for the storm, the report suggested little improvement in the labor market after job growth slowed sharply in August. The four-week moving average for new claims, a better measure of labor market trends, climbed 3,250 to 375,000, the highest since the middle of July.

Calculated Risk


The Labor Department says that the producer price index, which measures price changes before they reach the consumer, jumped 1.7 percent in August. The increase was mostly because gas prices soared 13.6 percent, the biggest gain in three years.

Food prices rose 0.9 percent, driven up by steep increases in the cost of eggs and dairy products.

Excluding the volatile food and gas categories, core wholesale prices rose only 0.2 percent, below July’s increase.

In the past 12 months, wholesale prices have increased 2 percent, a mild gain and far below the recent peak of 7.1 percent in July 2011.


The U.S. Federal Reserve appears set to launch a third round of unconventional monetary stimulus on Thursday while signaling that a weak U.S. economy may warrant ultra-low interest rates for at least another three years.

Not everyone believes the Fed will embark on another bond- buying spree, and plenty of doubts remain about the likely efficacy of such a move.

But Fed Chairman Ben Bernanke has made clear the central bank will not sit idly by while unemployment, currently at 8.1 percent, remains so far above levels consistent with a healthy economic recovery.

Many economists are confident the Fed’s policy-setting Federal Open Market Committee will deliver a third round of quantitative easing, or QE3. On median, they see a 60 percent chance, according to a Reuters poll.

The FOMC will announce its decision at about 12:30 p.m. (1630 GMT) at the close of a two-day meeting.


–QE STRATEGY: Many investors expect the Federal Reserve to launch a new round of bond purchases, often called quantitative easing or QE. One big question is how the Fed would structure such a program.

–WHAT TO DO WITH TWIST: Officials must decide what to do about the “Operation Twist” program if they launch a new bond-buying program. The Fed is funding the Twist purchases with money it gets by selling short-term Treasury securities.

–COMMUNICATION: How the Fed describes its impetus for action, and its criteria for even more in the future, could matter a lot. Is it responding to a darkening outlook? Or has it decided to take more aggressive action because its patience with slow growth and high unemployment is running out and it has a new commitment to changing that?

–WHETHER TO LOWER ANOTHER RATE: The Fed now pays banks 0.25% interest on reserves they keep with the central bank. The Fed could reduce the rate it pays on reserves that aren’t required of banks (known as excess reserves) a little bit to try to give banks more impetus to lend.

Tim Duy

I don’t anticipate a lump sum QE announcement.  I anticipate an open-ended commitment to regular purchases of securities, Treasuries and/or MBS, that can be scaled up or down in response to the economy.  Wall Street may be initially disappointed by the lack of a big number, but over time I think markets will come to appreciate the greater impact offered by a regular commitment based upon economic outcomes rather than the arbitrary amounts and time lines of previous QE efforts.


A simple pledge of month-to-month purchases with no guidance on how long they will continue is unlikely to satisfy the main decision makers on the FOMC. They rejected open-ended purchases in favour of a $600bn QE2 in November 2010 because they wanted to send a clear signal to the market. If no condition can be agreed then a similar lump sum programme is likely again.

A similar issue applies to extending the guidance until 2015. (Late 2015 seems more likely. Mid-2015 would simply restore the duration of the forecast from the start of this year and so would not imply easing.) Fed doves will not want any extension to be confused for a forecast that the economy is going to stay weak.

That means the forecast has to be accompanied by some language that says, without actually saying: “We have changed our reaction function and are now willing to tolerate a slightly higher path for inflation. We will therefore delay a rise in interest rates even after the state of the economy would appear to justify it.”


Apple [AAPL  669.79        ] – Goldman Sachs has boosted its price target on Apple to $810 from $790 and maintained its “Conviction Buy” rating following the release of the iPhone 5, as well as new iPod models. Standard & Poor’s has now repeated its “buy” rating on shares of Apple following Wednesday’s media event. (Read More: Why Apple Could Finally Crack China With iPhone 5.)

Royal Caribbean [RCL  29.61        ] – The company has raised its quarterly dividend by 20 percent to $0.12 from $0.10. The cruise line operator will pay the dividend on Oct. 9 to shareholders of record as of Sept. 25.

DSW [DSW  64.10  —  UNCH    ] – DSW has declared a special dividend of $2 per share, with the shoe retailer saying the announcement recognizes the company’s significant cash flow generation and a focus on returning value to shareholders.

Sanofi [SNY  43.26        ] – The drugmaker has received U.S. Food and Drug Administration approval to market a new once-a-day multiple sclerosis treatment. The pill, named Aubagio, pushed the relapse rate for MS patients lower by about 30 percent.

Intel [INTC  23.19        ], Advanced Micro Devices [AMD  3.89        ] – Both chipmakers have both been downgraded to “neutral” from “buy” at Citi, due to reduced estimates for 2013 PC unit growth.

Nike [NKE  100.84        ] – Nike has been downgraded to “neutral” from “buy” at Citi because of what it calls “limited upside potential,” though it is raising earnings estimates and its price target for the athletic footwear and apparel maker.

Ford Motor [F  10.21        ] – The automaker will discuss its CEO succession plan at its board meeting today, though it’s not clear whether any steps will be announced or appointments made. CEO Alan Mulally is expected to step down next year. (Read More: Ford’s CEO Transition Won’t Change Its Biggest Problem.)

Microsoft [MSFT  30.78        ] – Jefferies has begun coverage on Microsoft with a “hold” rating, saying that Windows 8 has the potential to “underwhelm” and the company must be successful in establishing renewed relevance with consumers.

Pier 1 Imports [PIR  19.55        ] – The retailer matched estimates with its latest earnings and revenues, but did raise its earnings forecast for the full year.

Citi has initiated coverage on a number of retailers, with “buy” ratings on American Eagle, Michael Kors, Limited Brands, Ross Stores, Tiffany, and TJX Cos.