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Labor Market Strength

Takeaway: Here's one reason today's initial jobless claims report points to a strengthening labor market.

This past week's non-seasonally adjusted initial jobless claims were lower year-on-year by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%).

 

This brought the four-week rolling average year-on-year change in non-seasonally adjusted claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

Here's a chart that shows rolling non-seasonally adjusted claims for the past five years. Note the the decline so far in 2013.

 

Labor Market Strength - Jobless claims


The US Dollar, S&P 500 and Brent Oil

Takeaway: As we say here at Hedgeye, if you get the US dollar right, you get a lot of other things right.

Let's take a look at these two charts below. Our models saw these correlations before they happened.

 

In the first chart, note the performance of the US dollar versus the S&P 500 in the last few months. You'll notice that as the US dollar moves higher, so does the S&P 500.  In fact,did you know the US dollar index is up for the sixth consecutive week? But as with any correlation risk, change can happen fast, so we'll be prepared if and when this correlation changes.

 

The US Dollar, S&P 500 and Brent Oil - usd spx  2

 

In our second chart, we show the relationship between the US dollar and Brent oil. That relationship is negatively correlated, meaning that as the US dollar moves higher, the price of Brent moves lower. Lower oil prices drive consumption growth, which effectively acts as a tax break for consumers. In other words, a strong dollar equals a strong America.

 

The US Dollar, S&P 500 and Brent Oil - usd brent  2


INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES

Takeaway: Consumer, Housing, & Labor Market trends continue to improve. Today's SA & NSA Initial Claims data showed further positive acceleration.

 

The domestic macro data continues to come in strong.  Yesterday’s Retail Sales numbers beat despite the positive January revision, Housing prices continue to accelerate alongside rising demand and falling inventory, and the February Private Employment data (ADP & BLS) was decidedly positive.  This morning’s initial claims data continued to confirm the positive acceleration in labor market trends as both the seasonally adjusted and non-seasonally adjusted series improved w/w. 

 

Meanwhile, the Strong Dollar = Strong Consumption dynamic continues to play out.  Strengthening SPX-$USD correlations (15D=+0.83), continued commodity deflation (15D Brent Correlation to $USD =-0.88, 30D = -0.87 ) alongside ongoing improvement in housing and employment trends still has us bullish on consumption oriented domestic equities, and bearish on treasuries, commodities/commodity exposure, and gold, on balance.   

 

The quantitative setup for equities remains positive with our risk management model signaling a higher high for the SPX.  On an immediate term basis, the next level of TRADE resistance sits at 1568.

 

Also, as a partial aside and update reminder as it relates to the consumer - there was a delay in the IRS processing of income tax refunds this year.  As of the end of February, Individual Income tax refunds were down ~$25B vs. last year which likely exaggerated any payroll tax hike related demand weakness observed in Jan/Feb. 

 

The latest treasury data (3/12) shows we are currently running ~$19B below last year’s pace, so the issue is beginning to resolve.  On the margin, this dynamic should serve as a benefit to demand into 2Q as refunds accelerate & play catch-up.  

 

Below is the weekly detailed analysis of the claims data from our head of Financials, Josh Steiner.  If you would like to setup a call with Josh or trial his research, please contact 

 

Labor Market Strength Accelerates

This past week's NSA (non-seasonally adjusted) initial jobless claims were lower YoY by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%). This brought the 4-week rolling average YoY change in NSA claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

On the SA (seasonally-adjusted) front, the numbers also looked good. This is what the market is paying attention to. As a reminder, the SA data is now facing a small, but growing headwind over the coming six months. The first chart in the note tells the story well. 

 

The Data

Prior to revision, initial jobless claims fell 8k to 332k from 340k WoW, as the prior week's number was revised up by 2k to 342k.

 

The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.5k WoW to 346.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.2%

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 1

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 2

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 3

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 4

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 5

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 6

 

INITIAL CLAIMS: LABOR MARKET ACCELERATION CONTINUES - JS 7

 

 

Joshua Steiner, CFA

 

Christian B. Drake

 

 


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INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION

Takeaway: The labor market is showing very strong signs of improvement on both a SA and NSA basis.

Labor Market Strength Accelerates

This past week's NSA (non-seasonally adjusted) initial jobless claims were lower YoY by -7.3%, which is roughly consistent with the rate of improvement over the previous two weeks (-8.9% and -8.0%). This brought the 4-week rolling average YoY change in NSA claims to -5.8% as compared with -4.2% in the previous week. What this signals is that the real labor market is experiencing accelerating improvement, and this has been the case for the last five weeks.

 

On the SA (seasonally-adjusted) front, the numbers also looked good. This is what the market is paying attention to. As a reminder, the SA data is now facing a small, but growing headwind over the coming six months. The first chart in the note tells the story well. 

 

The Data

Prior to revision, initial jobless claims fell 8k to 332k from 340k WoW, as the prior week's number was revised up by 2k to 342k.

 

The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2.5k WoW to 346.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -5.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -4.2%

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 1

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 2

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 3

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 4

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 5

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 6

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 7

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 8

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 9

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 10

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 11

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 12

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 13

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 14

 

Yield Spreads

The 2-10 spread rose 7.0 basis points WoW to 176 bps. 1Q13TD, the 2-10 spread is averaging 167 bps, which is higher by 25 bps relative to 4Q12.

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 15

 

INITIAL CLAIMS - THE LABOR MARKET SHOWS FURTHER ACCELERATION - 16

 

 

Joshua Steiner, CFA


What We're Reading This Morning

Takeaway: Here's what some of our sector heads are reading this morning.

Our Consumer Staples sector head is keeping a close eye on Herbalife. (From Reuters --

http://www.reuters.com/article/2013/03/13/herbalife-lawsuits-idUSL1N0C56D520130313)

 

Our Gaming, Lodging and Leisure team is following another stormy day at Carnival Cruise Lines. (From CNN -- 

http://www.cnn.com/2013/03/14/travel/cruise-ship-trouble/index.html)

 

Our Energy sector team is following the trend of China setting up US natural gas stations. (From Reuters -- 

http://www.reuters.com/article/2013/03/14/us-enn-lng-usa-idUSBRE92D09Y20130314)

 


Oil's Well

Client Talking Points

Tax Break for the Consumer

With Brent oil now down nine percent from a long-term lower high that it made in February, global consumption is getting a boost. That's because lower oil prices mean consumers pay less money at the gasoline pump. Also, as the dollar goes one direction,  Brent oil goes the other, according to our models. As such, as the dollar strengthens, Brent oil should continue to fall.

S&P 500 Direction

While Brent oil has a negative correlation to the US dollar, the S&P 500 has a positive one, according to our models. That means the S&P 500 currently moves higher as the US dollar moves higher. Hence, our big move in the S&P over the past few months. But, those correlations can change quickly, and they won't last forever. We'll continue to model that correlation, and let you know if and when it changes. That's why we're risk managers.

Asset Allocation

CASH 32% US EQUITIES 24%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

"Happy Pi Day. Today mathematical celebration is wholly irrational." -- @GeneralElectric

QUOTE OF THE DAY

"Bummed Out" -- New England Patriots' quarterback Tom Brady after he learned that receiver Wes Welker had agreed to sign with the Denver Broncos

STAT OF THE DAY

332,000, the number of weekly jobless claims, which put the four-week moving average to a five-year low


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