Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower

Conclusion : The headline initial claims number rose 15K week-over-week to 424k (10k after a 4k upward revision to last week’s data).  Rolling claims fell 1.75k to 439k. On a non-seasonally-adjusted basis, reported claims rose 14k week-over-week to a new yearly high.

 

Jobless claims are now at year-to-date highs and solidly above 400K.  As you may recall, jobless claims above 400K will lead to a higher unemployment rate over time.  Aside from the general economic malaise we have been noting, the other key risk to employment is the end of QE2.  In chart 4 below, we’ve highlighted the relationship between quantitative easing and claims, which appears strongly correlated.  This is a point that even Bernanke highlighted in his recent press conference when he stated, “It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk.”  In terms of sectors, accelerating jobless claims appear to be worst for the financial sector, which our Financials Team explains below.

 

 

It's No Coincidence That Claims Are at YTD Highs While XLF is at YTD Lows

 

We use claims as our primary frequency determinant in thinking about losses for the consumer book of balance sheet dependent financials. Thus, it is a critical signal that we remain right around the YTD high in rolling claims. 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. Even with the XLF underperforming, we remain cautious given this continuing development on the jobs front. Specifically, it's our expectation that claims will, at best, stagnate post QE2's end and, at worst, rise. To this end, take a look at our fifth 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.

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d1

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d2

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d3

 

 

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. 

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d4

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d5

 

 

Yield Curve Remains Wide

 

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 2Q is tracking 9 bps tighter than 1Q.  The current level of 260 bps is 3 bps tighter than last week.

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d6

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - d7

 

 

Financial Subsector Performance

 

The table below shows the stock performance of each Financial subsector over four durations. 

 

Jobless Claims Are At YTD Highs: The End of QE2 Will Take Claims Higher and Financials Lower - dd8

 

 

Daryl G. Jones
Director of Research

 


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