INITIAL CLAIMS: JOB LOSSES SLOW AT AN ACCELERATING RATE

Takeaway: The labor market is showing very strong momentum for 5 of the last 6 weeks, providing an ongoing credit and loan tailwind to the sector.

Labor Market: Very Solid Momentum

The rate of improvement in the labor market accelerated again last week. NSA claims were better by 8.2% vs last year, as compared with the 8.0% improvement in the previous week. The SA data, meanwhile, showed deterioration of 10k WoW. The divergence is attributable to the faulty seasonality adjustment dynamic we often highlight. To be clear, not only is the labor market improving, but it is doing so at an accelerating rate. We've hypothesized that a possible contributing factor to this is relatively low-paying service sectors like restaurants and hotels reducing hours to fall under the 30-hour "Obamacare" cap and hiring additional part-time or temp workers to compensate for the shortfall. 

In the past three years, the seasonal adjustment factor headwind dynamic has more than offset the underlying rate of improvement in the labor market, causing the appearance of a stagnating/deteriorating labor market from March through August (see first chart below). This has been a primary factor in the Spring to Fall selloff in 2010, 2011 and 2012. Thus far, 2013 is bucking that trend on the labor front, and we're seeing the obvious follow through from Financials with the XLF continuing to act well. We are now significantly beyond the starting point of correction in any of the previous three years. 

To reiterate, if we do get a correction in the coming weeks, we'd view it as a buying opportunity as the underlying health of both the labor and housing markets continue to show accelerating rates of improvement.

 

The Data

Prior to revision, initial jobless claims rose 14k to 354k from 340k WoW, as the prior week's number was revised up by 4k to 344k. The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.75k WoW to 347.25k.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.1% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%

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Yield Spreads

The 2-10 spread rose 13.7 basis points WoW to 182 bps. 2Q13TD, the 2-10 spread is averaging 158 bps, which is lower by -10 bps relative to 1Q13.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT