JOBLESS CLAIMS - ARE WE MOVING IN THE RIGHT DIRECTION AGAIN?

Takeaway: Don't believe what you read. While claims appeared to deteriorate significantly WoW, they actually improved slightly. Here's why.

A Quick Walk Through What's Really Happening & What the Market Thinks is Happening ...

Let's start with the perception of what's happening. The perception is that initial jobless claims rose 38k to 368k from 330k WoW. This is being regarded as bad, which is not a surprise. First, let's put this morning's headline number in context. As we flagged two weeks ago, we're simply seeing the reversal of very poorly adjusted number from two weeks prior. Two weeks ago claims dropped by 37k, their largest one week drop since the same week last year. Last year's drop of 46k was followed by a 23k bounce, which was in turn followed by a 4-week drop of 20-25k. This year, we saw claims drop 37k two weeks ago, drop a further 5k last week and this morning rise by 38k. In other words, we're right back where we started 3 weeks ago; actually, we're still 4k lower. Initial claims should trend steadily lower from here over the next four weeks as the final phase of Lehman's Ghost kicks into the seasonal adjustment factors. Thereafter, beginning in March, we'll begin to see the strength in the labor market cool off, and ultimately give way to weakness as April progresses to August.

 

Now, let's take a look at what's really happening. Rolling NSA claims improved year-over-year by -4.8% this week, that's an improvement vs. the prior week's -4.3% change. This may not sound significant, but it is because it marks an inflection from what had been two straight weeks of deterioration. Remember that a more negative number is better, as we're measuring the YoY change in jobless claims. This series has consistently been the best read on the underlying labor market condition. Bear in mind that tomorrow's payroll report suffers from the same seasonality problems as jobless claims. Tomorrow's report, by the way, should be very solid (partly because it's benefiting from an imaginary tailwind).

 

Given this dynamic, we continue to expect Financials to push higher through February and likely into March (high beta, value names continuing to lead the way), though as the labor data cools in March/April we expect to see the same pullback we've seen over the last three years. However, we think this year's pullback will be smaller than in years past, partly because Lehman's effect is shrinking, but also because the housing data should partially offset the perception of weakening labor dynamics.

 

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Yield Spreads, Meanwhile, Are Solidly Improving

The 2-10 spread rose 13.7 basis points WoW to 172 bps. 1Q13TD, the 2-10 spread is averaging 162 bps, which is higher by 20 bps relative to 4Q12.

 

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Joshua Steiner, CFA


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