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With Claims Up, Will Fed Blink on Friday?

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Currencies continued to tread water this morning as investors count down to the Jackson Hole Central Bankers Summit on Friday. Jobless claims rose more than expected, highlighting the continuous weakness in the U.S. labor market. Jobs are the missing ingredient in the U.S. recovery and the Fed's biggest problem. Unfortunately this morning's report only adds to the case for more stimulus - there is no argument that the U.S. economy is weak and more needs to be done. If the Fed chooses to focus on inflation at the expense of growth, they could turn the U.S. into Japan - where growth and inflation becomes nonexistent. Therefore the main question over the next 48 hours is whether Bernanke will blink on Friday. Given his conservative nature, he we will most likely err on the side of caution which means Bernanke will most likely opt for the least controversial way to lower yields and stimulate the economy. Earlier this week, we laid out the Fed's 5 options for Jackson Hole and we believe that the central bank will opt for either an ambiguous pledge to do all that is necessary with no concrete commitment, extend their 2013 low rates pledge to the securities portfolio or sell short term bonds and buy longer term bonds to "twist" the yield curve.

Jobless claims rose 417k in the week ending August 20th, up from 412k the previous week. Continuing claims on the other hand dropped from 3.721M to 3.641M. The rise in jobless claims is troublesome but partly distorted by a labor strike by 45000 Verizon Communications workers. With the labor disputes resolved this week, claims should ease. Gold continues to be a big focus with the price down another $23 in early U.S. trading. As we mentioned yesterday ( FX: Did the Gold Bubble Burst ), the decline in gold is not a reflection of an improvement in consumer sentiment but rather the impact of higher margin requirements and profit taking.

Meanwhile across the Atlantic, Bank of England Monetary Policy Committee member Weale sounded very bearish when he spoke this morning. Weale was once one of the most hawkish members of the MPC, voting for higher interest rates in 7 of the past monetary policy meetings. Earlier this month he retracted his vote and today he explains why. Like many of his peers, Weale was worried about financial contagion and weak growth in Europe and the U.S. With oil prices dropping, he felt the downside risks to inflation have lessened along with the need for a rate cut. He even made a 180 degree turn by saying that the central bank could provide more stimulus if needed through purchases of long dated bonds. With all MPC members voting to keep rates unchanged in August, the monetary policy committee as a whole has clearly become less hawkish which could threaten the pound's "safe haven status."

Expect more quiet trading with Gold, Apple and expectations for the Jackson Hole Summit in focus.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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