Tapering Probability Grows
There remains no let-up in the positive data flowing from the initial jobless claims series. The most recent week saw non-seasonally adjusted claims drop by -11.7% YoY, an improvement vs the preceding week's change of -9.9%. The last 10 weeks of data have averaged 9.3% improvement YoY, so this week's change is strong. While the rolling 4-wk average NSA data showed a modest acceleration to -7.8% from -7.6%, next week is likely to show sharp improvement as we'll be replacing the one week data point in the last 17 weeks of data with a presumably stronger number next week.
It's worth noting that as the rate of improvement in the labor market accelerates, so too does the expectation for the Fed to taper asset purchases. Hence the sea of red on the screen today in response to such healthy labor market data. Next week, my colleague Jonathan Casteleyn is planning on putting together an analysis of the likely tapering impact on equities across different durations. Stay tuned.
Last week we commented that based on our analysis of the seasonality distortions shifting from headwind to tailwind from September through February, we thought the SA number, with no underlying fundamental improvement, will drop from 333k to around 305-310k. Given this week's SA print of 320k, we think the seasonality distortion dynamics may actually push the series sub-300k with no further fundamental improvement, even though there is considerable fundamental improvement occurring based on the NSA data stream. For perspective on what a sub-300k claims series means, historically, since 1975 we've observed sub-300k data in 2Q06, 2H99, 4Q88, 3Q78, or less than 5% of the time. Specifically, 93 of the last 2,015 weeks have seen sub-300,000 SA IC weekly prints.
Our favorite ways to play a stronger-than-realized improvement in the labor market remain financials with levered exposure to home price recoveries as well as unsecured lenders. Capital One (COF) and Bank of America (BAC) remain two of our favorite ideas on the long side.
Prior to revision, initial jobless claims fell 13k to 320k from 333k WoW, as the prior week's number was revised up by 2k to 335k.
The headline (unrevised) number shows claims were lower by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4k WoW to 332k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.8% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.6%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT