Will This Time be Different?
In light of yesterday's announcement by the Federal Reserve that they will not begin tapering QE asset purchases, we thought it would be helpful to evaluate the historical relationship of QE and initial jobless claims. The chart below looks at the Fed's holdings of Treasury and Agency securities on the x-axis and compares those against corresponding levels of initial jobless claims (SA, rolling) on a zero lag basis. The time period is 2009-Present and the data points are weekly. We're using a second order polynomial (i.e. parabolic) regression here to reflect the fact that the level of jobless claims begins to reach frictional resistance below 300k. The equation of the line is shown in the chart for anyone who wants to run their own assessment. Assuming the Fed remains unchanged in its purchases for a further 6 months, which is what we would argue the market likely now assumes, the relationship suggests that we could expect to see claims running in the 275k range by March/April of next year. We're assuming $85bn/mo for 6 months would bring total Fed holdings to just under $4 Trillion.
Assuming their is a causal relationship here and assuming that it persists going forward, this would be very good news for lenders from a credit standpoint. One of our central tenets on COF has been that the labor market is getting better at a faster rate than people realize. This would certainly be consistent with that viewpoint.
While we're personally disappointed in the Fed's decision, the game is what it is, and this has been the historical relationship between claims and Fed securities holdings, i.e. QE. Rather than fight the logic of the decision, we'll look to profit from understanding its implications.
Prior to revision, initial jobless claims rose 17k to 309k from 292k WoW, as the prior week's number was revised up by 2k to 294k.
The headline (unrevised) number shows claims were higher by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7k WoW to 314.5k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -16.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.3%.
The 2-10 spread fell -10 basis points WoW to 236 bps. 3Q13TD, the 2-10 spread is averaging 234 bps, which is higher by 63 bps relative to 2Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT