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Initial Claims Flat; Expect Volatility in Coming Weeks

Initial claims came in at 400k last week, 2k higher than the reported number the prior week (but 1k lower than the revised print).  Last week, we noted that significant volatility is typical at this point in the year due to manufacturing layoffs.  Because the annual furloughs shift slightly in timing, the seasonal adjustment model doesn't do a good job of correcting for the effect.  Accordingly, we expect a degree of snap-back in initial claims in the next 1-2 weeks.  

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - rolling

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - raw

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - NSA

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - seasonality

QE, initial claims, and the S&P are all tightly related, as the following two charts demonstrate.  This suggests that further improvement in initial claims will be difficult in the absence of QE. 

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - s p

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - fed

2-10 Spread Flattening Pressures Margins

The 2-10 spread has flattened dramatically in the last week, putting pressure on bank margins.  This week's level of 229 bps is 26 bps tighter than a week ago.  Banks have been increasing positioned for rising rates, as we noted in a report earlier this summer, which amplifies margin pressure. 

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - spreads

INITIAL CLAIMS CLOSE TO FLAT; 2-10 SPREAD GETS SQUEEZED - spreads QoQ

Joshua Steiner, CFA

Allison Kaptur