Not So Fast: Initial Claims Hit YTD Lows Falling 34k, But They Fell 39k This Week Last Year Too
The headline initial claims number fell 34k last week to 407k. Rolling claims fell to 436k, 7.5k lower than the previous week. For both series, today’s report is a new YTD low and the lowest level since July 2008 – certainly positive at face value. It is worth noting that during this week last year, claims had a comparable size improvement (down 39k) only to then unwind that improvement in the following weeks (see charts below for reference). We continue to remind investors that the unemployment rate won't improve until we see claims move into the 375-400k range - this is based on our analysis of past cycles. That said, it is worth highlighting an important caveat. This recession has been different in that it has pushed the labor force participation rate down by ~200 bps, which has had a correspondingly positive improvement on the unemployment rate. In other words, the unemployment rate isn't really 9.5%, it's 11.5%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 11.5% actual rate as opposed to the 9.5% reported rate. All that being said, on the margin, today's data is positive.
We look at the yield curve as a proxy for industry NIM tailwinds or headwinds. The following chart shows 2-10 spread by quarter while the chart below that shows the sequential change. After falling sharply for two quarters, the 2-10 spread has stabilized thus far in 4Q, rising 6 bps thus far (average of QTD versus average of 3Q). Yesterday’s closing value of 231 bps is down from 238 bps last week.
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA