Initial Claims Rocket 45k
The headline initial claims number rose 45k WoW to 474k (43k after a 2k upward revision to last week’s data). Rolling claims rose 22k to 431k. A Labor Department spokesman said that the increase was due to temporary layoffs in the auto sector, and also noted an effect from some New York school employees, who can claim unemployment during spring break. On a non-seasonally-adjusted basis, reported claims rose 27k WoW, an atypical seasonal move.
Big picture, regardless of whether this week's number was artificially higher due to one-time events, the takeaway from this morning's data is that rolling jobless claims are now up for the past 9 weeks, and even more importantly we're now at the YTD high in rolling claims. We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. The last time we saw such an inflection in the trend in jobless claims was summer 2010, a period in which the XLF lost roughly 20% of its value. Given the XLF is only modestly off its recent highs, we would be cautious given this continuing development on the jobs front. To this end, take a look at our fourth chart showing the overlay of jobless claims with S&P 500. The current divergence is among the widest we've seen in the last few years suggesting that either the market is due for a significant correction in the near-term or claims should fall precipitously in the next few weeks.
We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down. If claims return to this level, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.8% rather than 8.8%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.8% actual rate.
Two relationships that we are watching closely are the tight correlation between the S&P and claims and between Fed purchases (Treasuries & MBS) and claims. With the end of QE2 looming, to the extent that this relationship is causal, it is quite concerning.
Yield Curve Remains Wide
We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 5 bps tighter than 1Q. The current level of 264 bps is 7 bps tighter than last week.
Financial Subsector Performance
The table below shows the stock performance of each Financial subsector over four durations.
Joshua Steiner, CFA