KEY DATA: CPI: +0.4%; Excluding Food and Energy: +0.1%/ LEI: +0.7%/ Phila. Fed: +8.5 points/ Claims: -12,000

IN A NUTSHELL: “If the Fed needs confirmation that the economy is picking up steam, they got some of that today.”

WHAT IT MEANS: It is doubtful that Janet Yellen and her band of petrified monetary policy makers will throw caution to the wind and start raising rates like crazy. She made that quite clear yesterday. But she also said that the decision to start tightening, if you can call moving up from 0% to 0.25% is tightening, will be driven by the data. So, what are the data saying? On the inflation front, the disinflationary process looks like it is over. Consumer prices jumped, largely because of the rise in energy costs. Commodity prices were stagnant. Food, furniture, major appliances and apparel costs fell, but medical goods and new truck prices rose. On the other hand, the service component continues to show some gains and in May, rising airline fares led the way. Hospital services and rent were also up. Over the year, overall consumer costs were flat and core prices decelerated slightly. In other words, inflation is still not a major worry for the Fed. But with consumer costs rising sharply, real earnings fell slightly as the solid gain in hourly wages was offset by the faster rise in prices.

Philadelphia may not be the hot bed of manufacturing, but the Philadelphia Fed’s manufacturing index does tend to reflect manufacturing nationally. If the index rises, as it did sharply in early June, then that is a sign that we should be seeing a pick up in other measures, including the Institute for Supply Management’s manufacturing index.

As for the labor market, the days of modest job gains, or make that the couple of months of subpar increases, also looks to be behind us. Jobless claims fell sharply and the 4-week moving average continues to trend downward. The level is consistent with strong monthly payroll increases and I expect that to be the case during the second half of this year.

MARKETS AND FED POLICY IMPLICATIONS: The Fed made it clear that once rate hikes begin, the process will be slow. Maybe. This is a group of forecasters that are poor “nowcasters”. If you don’t like their forecast, wait a meeting (6-7 weeks) and it will change. A strong June employment report could cause the forecasts to change. They will not start raising interest rates sharply, but the implied 100 basis points a year process makes very little sense. We are starting at zero, so even a one percent increase still keeps us nearly three percentage points below a “neutral” or long-term funds rate. Yesterday, Janet Yellen sounded like I do when I try to calm my somewhat hyper cat: “Now take it easy, Gibbs, things will be fine, don’t get excited”. He does start purring, just like investors have. But I still yell at him when he starts attacking his sister and if the economy picks up steam, don’t expect the Fed to be calm. They will raise rates more frequently than every other meeting. As for now, investors are purring but that calm will not last if the data keep coming in as strongly as they did today.