Scott J. Brown Ph.D., Chief Economist Raymond James Investment Services

There were several surprises in the economic data reports, mostly to the downside. The market took some comfort earlier in the week as the Producer Price Index (PPI) seemed to suggest that deflation was less likely to be a problem and that manufacturing output was strong in July. However, the core PPI (reported up 0.3%) was boosted by what is likely to have been a seasonal adjustment quirk in light motor trucks. Industrial production was boosted partly by a 9.9% jump in motor vehicle production, which reflected fewer-than-usual summer plant closings (prior to seasonal adjustment, auto output fell 20.3% in July).

On Thursday, the stock market was rattled by a further increase in initial claims for unemployment insurance benefits (which may or may not be distorted) and by a surprisingly weak Philadelphia Federal Reserve Index (-7.7, compared to expectations of +7.0). [Read more]

Scott J. Brown Ph.D., Chief Economist Raymond James Investment Services

The Federal Open Market Committee (FOMC) left short-term interest rates unchanged and repeated that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” In its assessment of the economic outlook, the FOMC noted that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

More importantly, the FOMC voted to keep the level of its securities holdings constant by reinvesting principal payments from agency debt and agency mortgage-backed securities in long-term Treasury securities. By itself, this isn’t a huge move, but it is an important signal that the Fed could do more later on. [Read more]