STICK WITH THE SIGNAL
Policy issues have dominated headlines and driven most of the equity and fixed income market price action over the last few weeks.
The private sector data we have received for September has been largely equivocal with ISM Mfg and Consumer Credit marginally higher sequentially, Mortgage Applications and Small Business/Consumer confidence flat, and ISM services and Vehicle sales down marginally.
The labor market strength, however, has not been equivocal. Inclusive of today’s jump in Initial claims (which is still positive after adjusting for the CA computer system and government shutdown impacts) the trend in the labor market remains decidedly positive. More detail on this week's claims data below.
From an Investment Management perspective, with the bulk of federal government sourced data releases embargoed or unavailable (ie. a dearth of fundamental data), our Prices Rule Risk Management model becomes an increasingly important signaling mechanism for driving portfolio decisions.
So what are the key metrics and levels that matter right here? The Dollar, VIX, and S&P500.
To reiterate the key levels of focus Keith highlighted in this morning’s Early Look.
- U.S. Dollar: The $USD long-term TAIL line of support = $79.21
- VIX: VIX TREND Support sits at $18.98
- S&P500: SPX TREND Resistance sits at $1663
In short, with the USD holding above its TAIL line, if the VIX can breach $18.98 on the downside and the SPX can hold 1663, the risk-reward to being long shifts positive and we cover more shorts and play for the 23 handles of immediate term upside in equities. If the VIX and SPX fail to breach & hold their respective levels, we continue to keep gross exposure relatively low, net exposure tight and sit on our hands a bit longer.
Dollar Up + Rates Up + Stocks Up remains the constellation of price factors we want to see persist to remain constructive beyond the positive, immediate term TRADE setup.
Below is the breakdown of this morning's claims data, along with some Financial sector specific takeaways, from the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
- Hedgeye Macro
INITIAL CLAIMS: Not So Fast
We've been singing the praises of the initial jobless claims data for a while now, particularly as it showed noted divergence vs some of the other labor market data series. This morning we found out that at least a portion of the recent strength (since the start of September) was attributable to shenanigans in California new software for processing claims. For the last 4 weeks, since roughly the start of September, California has had a backlog of claims due to difficulties arising from their new software system. This past week, they finally got the bugs out of it and caught up. The effect was an increase of ~33k SA jobless claims. Total SA claims rose by 66k this week, and half that was attributable to CA, said a Labor Dept spokesperson. Beyond this, there was a further 15k increase this week from defense companies laying people off temporarily due to the government shutdown.
What we've done in the chart below is reconstruct the last five weeks of data to reflect CA's issues and the 15k temp layoffs from defense. The takeaway is that the trend is intact. Rolling NSA claims, adjusted for these issues, was lower by 14.1% in the latest week, which is almost right in line with the trendline since the start of the year, and only nominally weaker than the best print we've seen YTD of -14.9% 3 weeks ago.
The bottom line is that this morning's data looks terrible, but the underlying trends in the labor market remain exceptionally strong. We would reiterate our bullish stance on being levered to the ongoing jobs recovery. This morning we flagged Capital One (COF) in a note as being a great way to play this theme.
Nuts & Bolts
As there was no revision to the prior week's data, SA initial jobless claims rose 66k to 374k from 308k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 20k WoW to 325k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -18.2%, but this reflects the impact of the CA distortion.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT