Initial Claims Fall 5k WoW
Initial claims fell 5k WoW last week (9k net of the revision to the prior week). This brings the level to 423k. On a 4-week rolling basis, claims are up 1k WoW to 421k. As a reminder, in looking at the spread between the S&P and 4-wk claims, the current S&P level would equate to a rolling claims level of 460k.
Our general take here remains that the market and economy are reflexive, as George Soros would say. In other words, markets don't predict recessions, they cause them. The volatility over the past few months, and continuing this morning, is creating a profound loss of confidence among consumers and employers. We have been surprised to date by the resiliency of the claims figures in the face of this. We would be equally surprised if it persists. To reiterate, based on our simple mean reversion framework highlighted above, we would expect to see claims rise to ~460k mean reverting to where the market is.
In the fourth chart below we show the relationship between the Fed's Treasury and Agency holdings and initial claims. The two series appear to be related. Both series also show a relationship with the S&P. The direction of causality isn't certain here. Our understanding is that Fed purchases boost risk assets, particularly equities, and an increase in equity levels drives claims lower. According to that scheme, if Operation Twist fails to boost risk assets, we would not expect a positive reaction in initial claims.
2-10 Spread Not Letting Up
Acute margin pressure remains in force, looking at the 10-year yield and the 2-10 spread. The 10-year yield is now 133 bps lower than it was at the end of 2Q.
The chart below shows the performance of financial stocks by subsector.
Joshua Steiner, CFA
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