What's a Fed to do?

As good as the inflation report was last week, continuing strength in the labor market revived concern that the Federal Reserve may have more work to do. 

Weekly jobless claims unexpectedly fell, from 237,000 to 228,000. This coincides with the timing of the July payroll employment survey, implying that solid gains could be in store when the monthly report is released in early August. Markets had tried to convince themselves that the inflation genie was finally back in the bottle, but it looks like it’s still putting up a fight.

Retail sales for June showed a surprisingly strong core, under the more muted 0.2% headline gain. Sales for both April and May were revised higher, confirming employment-led strength in the consumer. The National Home Builders Association housing market index rose for the seventh straight month and was the strongest reading in a year. A key factor here is the lack of resale inventory, as current homeowners resist selling homes with lower mortgage rates, and builders shy away from new builds in the currently high mortgage-rate environment. The only nick in the economic data came from June industrial production, which fell 0.5%, and May’s output was revised to a 0.5% drop. So, all in, economic data continue to support a steadily growing economy, driven by high consumer confidence from strong labor markets and falling inflation.