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Jobs: Fed Head In the Sand

Takeaway: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.

Editor's note: This is an excerpt from a piece written by Hedgeye Financials Sector Head Josh Steiner. For more information on how you can subscribe to Hedgeye research click here.

 

Jobs: Fed Head In the Sand - headsand

Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials."

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

Jobs: Fed Head In the Sand - stein1

 

Jobs: Fed Head In the Sand - stein2


INITIAL CLAIMS & 3Q13 GDP: GOBBLE GOBBLE

3Q13 GDP (1st Revision): Juiced by inventories. Rising probability of a sequential slowdown

 

3Q13 GDP was revised +0.8 higher to 3.6%, marking the best growth number since 1Q12.  Under the hood, the component dynamics that characterized the advance estimate – namely, inventory accumulation alongside middling consumption/real final sales – were further exaggerated in this first revision.

 

Inventory Accumulation contributed +1.68 to GDP while consumption (services) growth slowed 40bps sequentially and real final sales (GDP less Inventory change) and real final sales to domestic consumers  (GDP less exports less inventory change) both came in sub 2%. 

 

While backlogs are growing and vendors remain largely unconcerned with inventory levels according to the ISM survey data, the positive impact to GDP should reverse as inventory drawdown will be challenged by final demand still constrained by flagging personal income growth. 

 

In short, the strong headline print belied a moderately more vapid reality.   While momentum in the manufacturing base remains ongoing and disposable personal income growth comps ease through 2014, a sequential slowdown in growth is increasingly probable. We’ll get a first look at personal income and spending data for 4Q13 tomorrow alongside the payroll report. 

 

On the employment side, despite sizeable fluctuations in the absolute number of non-farm payroll gains the last few month, the rate of growth on a 2Y basis has held relatively consistent at ~+1.66% - a phenomenon largely stemming from seasonality.  Consensus is basically sitting right on this growth number with the current NFP estimate for November at +185K.  As a reminder, seasonality will build as a positive support to both the NFP and jobless claims figures through 1Q14.

 

From a policy perspective, today's growth data is probably another non-catalyst with inflation still holding below target, service consumption growth flagging and sustained acceleration in the aggregate labor market data still absent. 

 

But at the same time, if you can’t taper at 3.6% GDP, when can you taper?

 

- Hedgeye Macro

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - GDP 3Q13 Prelim

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - UNITED STATES

 

 

 

INITIAL CLAIMS:  The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.


Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed.

 

Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

 

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 1

 

INITIAL CLAIMS & 3Q13 GDP:  GOBBLE GOBBLE - JS 2

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 

 

 


[VIDEO] Keith's Macro Notebook 12/5: JAPAN, EURO, UST 10YR


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What's New Today in Retail (12/5)

Takeaway: Big week for UA Apparel. DG offsets weak comp. GES SIGMA in the toilet. Cotton could help HBI/GIL until it hurts. DKS/hockey??? COST M AMZN

 

EVENTS TO WATCH

 

Hedgeye Black Friday Consumer Survey: Focus on JCP.  We'll be conducting a follow-up to our prior consumer survey (which helped us call a JCP beat and KSS miss) following Black Friday weekend and Cyber Monday. We'll have results next week, and will have an updated presentation accordingly. If you are interested in our results, please email sales@hedgeye.com, or .

 

FIVE - Earnings Call: Thursday (12/5) 4:30 pm

ZUMZ - Earnings Call: Thursday (12/5) 5:00 pm

ULTA - Earnings Call: Thursday (12/5) 5:00 pm

 

ECONOMIC DATA

 

Athletic Apparel Data

 

Takeaway: This week is meaningless due to the holiday being off by a week compared to last year's calendar. But market share data is still relevant. The big winner from our perspective is UnderArmour, which gained over 2 full points of market share for the week. Nike did well, but let's face it…it needs to gain 1-2 points pf share simply to hit its stated financial goals.

 

What's New Today in Retail (12/5) - chart1 12 5

What's New Today in Retail (12/5) - chart2 12 5

What's New Today in Retail (12/5) - chart3 12 5

What's New Today in Retail (12/5) - chart4 12 5

 

COMPANY NEWS

 

KSS - Kohl’s Stores Open Around the Clock for First Time Ever from December 20 through Christmas Eve

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=1882204&highlight=)

 

  • "Kohl’s Department Stores today announced that for the first time ever, it will keep its doors open for more than 100 hours straight – beginning at 6 a.m. on Friday, Dec. 20 through 6 p.m. on Christmas Eve, Tuesday, Dec. 24."

 

Takeaway: Only one reason Kohl's opens 24/7 for 5 days. It's simply sitting on too much inventory.  Good luck to them in having  to pay 1.5-2x wages to the employees working in each of Kohl's 1,158 stores. KSS has been -- and remains -- one of our top shorts.

 

FNP - Kate Spade Saturday Opens in SoHo

(http://www.wwd.com/retail-news/specialty-stores/kate-spade-saturday-opens-in-soho-7299347)

 

  • "The retailer’s first Manhattan store, a 1,500-square-foot unit at 152 Spring Street, stands out like a giant canary with its storefront painted the brand’s trademark bright yellow."
  • "While the company is opening stores slowly and deliberately for now, Kyle Andrew, senior vice president and brand director, said Kate Spade Saturday could surpass the store count of its sister brand, Kate Spade New York, which boasts 80 units in the U.S. and 100 overseas."
  • "...at John F. Kennedy International Airport, there’s a shock of yellow in the middle of Terminal 5, JetBlue’s hub...Both the store and airport pop-up play on Kate Spade Saturday’s tech-infused concept. The store has a semicircular bar with a charging station, iPads and a customization tool for personalizing Weekender bags."
  • "The SoHo store is Kate Spade Saturday’s second in the U.S. after a Houston unit. There’s a pop-up on Gansevoort Street in the Meatpacking District and one in Los Angeles. The brand also has six units in Japan and a store in Singapore."
  • "Products universally appeal to consumers across cultures and climates. 'Our bestsellers here are our bestsellers in Japan and Singapore,' Andrew said. 'The Weekender bag is a universal favorite. The slip-neck T is universally loved. Shoes and dresses have been great and anything in our black-and-white-striped logo pattern is popular.'”

 

What's New Today in Retail (12/5) - chart7 12 5

 

Takeaway: KS Saturday has been in test mode for a while now, and is just starting to roll out permanent doors in the US. If the concept is able to capture some momentum we may take up our sq. ft. estimates, which are already the highest on the Street. The key thing we need to keep in mind is that sales productivity at KS Saturday (we can't call it KSS for obvious reasons) is not yet proven, and our sense is that it will max out about a third below KSNY. As store addition numbers go up, we may take aggregate productivity numbers down. Margins should still march higher from 12% today to 22% over 3-years.

 

3Q SIGMAS

 

  • Here are the SIGMA charts for 2 companies that just printed 3Q earnings -- both of whom missed comp expectations, but beat the quarter by a few pennies.

 

DG - Q313 Earnings

 

What's New Today in Retail (12/5) - chart8 12 5

 

DG: The Street likes what it sees in DG, and for the most part, so do we -- despite our bearish long-term view on the business. The SIGMA move is pointed toward the upper left, indicating that inventories are getting better on the margin. We don't see a lot of that these days.

 

GES - Q314 Earnings

 

What's New Today in Retail (12/5) - chart9 12 5

 

GES: This company can't get out of its own way. Comping down 5%? U-G-L-Y. SIGMA showed slight erosion in inventory/sales. But the big factor is the 225bp erosion in margins. Most notable is the fact that the company has been over inventoried for 8-quarters now -- and still can't figure out the formula as to how to comp consistently and grow margins. It has issues…we'd avoid it.

 

DKS - Dick's Sporting Goods Opens NHL Super Shops

(http://www.wwd.com/menswear-news/retail-business/dicks-opens-nhl-super-shops-7299220?module=hp-mens)

 

  • "Dick's Sporting Goods and the National Hockey League have teamed up to open NHL Super Shops in three hockey-crazed cities around the country."
  • "The shops, which measure about 400 square feet, were installed in Lombard, Ill., near Chicago; Cranberry, Pa., near Pittsburgh, and West Nyack, N.Y., in the suburbs of New York City, in time for Black Friday. If the shops are successful, the concept is expected to be rolled out further for next year."

 

What's New Today in Retail (12/5) - chart6 12 5

 

Takeaway: We like hockey at Hedgeye, but we highly doubt this will help DKS comp. At least they picked three of the best hockey markets in the US -- though (sadly) that's not saying much. Our own biases aside, aren't there other sports the company could focus on that are more relevant to the US Consumer?

 

COST - Costco Wholesale Corporation Reports First Quarter Fiscal Year 2014 and November Sales Results

(https://www.streetaccount.com/pressrelease.aspx?ticker=COST&intraday_id=1406033)

 

  • "Costco Wholesale Corporation today reported net sales of $8.78 billion for the month of November, the four weeks ended December 1, 2013, an increase of five percent from $8.40 billion during the similar four-week period last year."
  • "For the thirteen weeks ended December 1, 2013, the Company reported net sales of $26.80 billion, an increase of six percent from $25.40 billion during the similar period last year."

 

What's New Today in Retail (12/5) - chart5 12 5

 

Takeaway: COST isn't really a 'Black Friday' play. But even still, it didn't exactly knock the cover off the ball last month. The saving grace is that Gas crushed the Int'l comp -- 1% including gas, and 6% excluding gas and fx. That doesn't change the total sales figure that the company reports at the end of the quarter. But it gives some explanation about why sales were so weak.

 

AMZN - Lush Cosmetics in Legal Tangle With Amazon

(http://www.wwd.com/fashion-news/fashion-scoops/lush-battles-amazon-7299964?module=hp-beauty)

 

  • "Lush Cosmetics has entered into a legal dispute with Amazon in the U.K. over trademark infringement. In a case that was heard in the U.K.’s high court last week, Lush argued that Amazon is buying advertising words related to Lush in order to drive traffic to Amazon’s site, which does not sell Lush products."
  • "Lush also said that when customers search for Lush’s products on Amazon’s U.K. site, they’re shown competitors’ products."
  • "The court is expected to release its verdict early next year. Amazon in the U.K. did not respond to requests for comment."

 

Takeaway: This shouldn't have any major implications, but we're interested to see how this plays out. We wonder why Luch isn't doing business with Amazon in the first place. The risk for AMZN is if Lush can prove that it has made its best good-faith effort to kick start the partnership, and yet AMZN went ahead and used its trade name to sell other cosmetics.

 

M - Macy's to Unveil Thalía Collection

(http://www.wwd.com/retail-news/department-stores/macys-to-unveil-thala-collection-7299816?module=hp-retail)

 

  • "At Macy’s, 16 percent of the traffic is Latino — and it’s been a major market miss. Acknowledging its 'white space,' or dearth of products, targeting Latinos, Macy’s today will unveil a Thalía Sodi collection for a spring 2015 launch."
  • "Underscoring how much the retailer wants to better connect with Latinos, Gennette said Thalía dresses, tops, pants, shoes and jewelry will be rolled out to 300 stores and macys.com from the outset, and that additional categories are in the works. A multiyear agreement for the exclusive Thalía Sodi brand was signed, though no financial details were disclosed."

 

Takeaway: The fact that they refer to Latino's as a 'White Space' shows that perhaps they haven't really figured it out yet.

 

INDUSTRY NEWS

 

Weak Cotton Prices Continue in November

(https://www.sourcingjournalonline.com/weak-cotton-prices-continue-in-november/)

 

  • "Cotton prices dropped by a penny in November, finishing the month at 75.6 cents per pound. Larger-than-expected global production and weakening demand in Asia continue to put downward pressure on prices."
  • "Although commodities forecasters were expecting global production to fall in the coming year, particularly in the U.S., it now looks as if crops in key regions might be bigger than originally expected. India will have larger-than-expected crops due to an abundance of rain during monsoon season and clear weather during the harvest.  U.S. cotton market experts are now predicting yields that top prior expectations."
  • "China began to offer for sale some of the cotton reserves it had been stockpiling in support of local prices. However, the price at which it offered the stocks was higher than the market price for imports, so got few takers."

 

Takeaway: Good initially for HBI and GIL. But if lower cotton once again causes deflation in the industry, these guys are in trouble.

 

 

 


ECB and BOE on HOLD; UK Economic Outlook Raised

Draghi Backstop In Place, EUR/USD grinds higher


After a very surprising 25bps cut to the main interest rate at its last meeting on 11/7, the ECB kept rates on hold today, as expected by consensus forecasts. We actually saw no need to use the monetary “powder” last month given the improving economic data across the region supporting our Q4 macro theme call of #EuroBulls. (For more see our note titled “Just Charts - #EuroBulls”).

 

We expect the ECB’s accommodative stance to continue to support both equities and the common currency. Our preference is German equities (via the eft EWG); we also like the EUR/USD (etf FXE), which got a lift following today’s announcement. Our quantitative levels are included in the chart below.

 

ECB and BOE on HOLD; UK Economic Outlook Raised - yyy euro

 

Press Conference Details

  • No material change to the economic and inflation assessment or outlook (Dec. Projections below). Mario Draghi says fiscal consolidation measures at the country level should be “growth friendly” and to expect a prolonged period of low inflation, followed by inflation rates close but below 2%
  • Continued mantra that monetary policy will remain accommodative for as long as necessary and to expect key ECB interests rates at present or lower levels for an extended period of time
  • On non-standard measures, Draghi noted that a negative deposit rate was briefly discussed
  • On the use of non-standard measures Draghi said the Bank is “ready and willing to act within the forward guidance framework” and is considering numerous options, if needed
  • On the issuance of another LTRO, Draghi made a point to note that first LTROs were successful given the level of uncertainty around when they were issued two years ago. However, he said if a similar operation were to be issued, the framework must assure it’s being used to extend credit to the real economy, and not used to subsidize capital formation (carry trade operations) by the institutions. 

 

To read a copy of Draghi’s prepared remarks click here.

 

ECB’s December Macroeconomic Projections


GDP:  -0.4% in 2013 (unch vs Sept.); +1.1% in 2014 (revised up 10bps); +1.5% in 2015 (unch)

CPI:  +1.4% in 2013 (revised down -10bps vs Sept.); +1.1% in 2014 ( revised down -20bps); and +1.3% in 2015 (unch)

 

 

 

UK Fiscally Strong; Growth Projections Push Higher:


As we expected, the BOE kept the main interest unchanged at 0.5% and the asset purchase program (QE) target unchanged at £375B. We continue to be bullish on the UK economy, the GBP/USD, and UK equity market (via the etfs FXB and EWU, respectively). For more see our note titled “Just Charts - #EuroBulls”).

 

Additionally, today Chancellor of the Exchequer George Osborne presented his Autumn Statement. In it, he revised many economic forecasts (versus a prior March forecast) that point to an improved outlook, and supportive of our bullish outlook on the GBP/USD (via the etf FXB) and UK equities (etf EWU).

 

GBP/USD Levels


ECB and BOE on HOLD; UK Economic Outlook Raised - yy. pound

 

 

Forecast Updates:


2013 

  • GDP +1.4% vs prior +0.6%
  • CPI +2.6% vs prior +2.8%

2014 

  • GDP +2.4% vs prior +1.8%
  • CPI +2.3% vs prior +2.4%

2015 

  • GDP +2.2% vs prior +2.3%
  • CPI +2.1% vs prior +2.1%
  • 2015 unemployment rate at 7.0% in 2015 declining to 5.6% in 2018
  • Budget deficit forecasts as % GDP lower and will run a small surplus in 2018/19
  • Pension age raised to 68 in the 2030s and 69 in the late 2040s
  • Bank levy raised to 0.156% from 0.13% from Jan-14; raises £2.7B and £2.9B in next two years
  • Will introduce a new tax allowance for investment in shale gas
  • Foreigners who sell second homes in the UK will have to pay capital gains tax

To read a copy of Osborne’s Autumn Statement 2013 speech click here.   

 

Matthew Hedrick

Associate


INITIAL CLAIMS: GOBBLE GOBBLE

Takeaway: The Fed needs to bury its head further into the sand to reconcile its policy on purchases with the realities of the labor market.

Rising Rates Love Falling Claims

It's getting harder to ignore the improvement in the labor market, unless, of course, you're the Fed. Increasingly, however, it seems as though the bond market is taking fewer cues from the Fed and more from the labor market. True, seasonally-adjusted initial claims have a 2-handle on them principally because of the Thanksgiving mismatch this week vs last year (a week later this year), but adjusting for that and all the other recent turbulence in the data reveals one unmistakable fact. The data continues to strengthen and the bond market is taking notice. 

 

Aside from the obvious, which is that this is more good news for credit quality, the upward pressure being exerted on rates is ferreting out clear winners and losers, i.e. good for banks and online brokers, and bad for homebuilders and mortgage REITs. For more details, see our note from 11/22 "#Rates-Rising: A Current Look at Rate Sensitivity Across Financials", a link to which can be found here.

 

Next week should be the first week in a long time where we get a clean print on the labor market, so stay tuned.

 

Nuts & Bolts

Prior to revision, initial jobless claims fell 18k to 298k from 316k WoW, as the prior week's number was revised up by 5k to 321k.

 

The headline (unrevised) number shows claims were lower by 23k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -10.75k WoW to 322.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -21.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -13.3%

 

INITIAL CLAIMS: GOBBLE GOBBLE - 1

 

INITIAL CLAIMS: GOBBLE GOBBLE - 2

 

INITIAL CLAIMS: GOBBLE GOBBLE - 3

 

INITIAL CLAIMS: GOBBLE GOBBLE - 4

 

INITIAL CLAIMS: GOBBLE GOBBLE - 5

 

INITIAL CLAIMS: GOBBLE GOBBLE - 6

 

INITIAL CLAIMS: GOBBLE GOBBLE - 7

 

INITIAL CLAIMS: GOBBLE GOBBLE - 8

 

INITIAL CLAIMS: GOBBLE GOBBLE - 9

 

INITIAL CLAIMS: GOBBLE GOBBLE - 10

 

INITIAL CLAIMS: GOBBLE GOBBLE - 11

 

INITIAL CLAIMS: GOBBLE GOBBLE - 12

 

INITIAL CLAIMS: GOBBLE GOBBLE - 13

 

INITIAL CLAIMS: GOBBLE GOBBLE - 19

 

INITIAL CLAIMS: GOBBLE GOBBLE - 14 2

 

Yield Spreads

The 2-10 spread rose 9 basis points WoW to 255 bps. 4Q13TD, the 2-10 spread is averaging 235 bps, which is higher by 1 bp relative to 3Q13.

 

INITIAL CLAIMS: GOBBLE GOBBLE - 15

 

INITIAL CLAIMS: GOBBLE GOBBLE - 16

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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