Strong Employment Component in Philly Fed Index Provides Hope

Philly Fed Index scored 7.3 points, lower than early expectations which stood on over 10 points. This is a very early indicator – it relates to the current month of January.

The dollar is stronger after the publication. EUR/USD is dropping towards support at 1.2873, after peaking out at 1.2925 earlier.

In many cases, the Philly figure is an early indication for the ISM Manufacturing PMI published early in the following month. Note that this number is still in positive ground, meaning expansion for a fourth month in a row.

Another positive way to look at this number is looking at the sensitive employment component, which remained practically unchanged at 11.6.

This adds optimism to the beaten labor market and joins the encouraging drop in jobless claims reported earlier. Unemployment claims fell to 352K, the lowest in almost four years.

On the other hand housing starts fell short of expectations. They now stand on 0.66 million, down from 0.69 million.

There were fears that part of the growth at the end of 2011 was related to tax incentives which were about to expire. The initial numbers for 2012 show that the positive trend continues.

Note that the Fed could still start a third round of QE based on housing numbers.