Playing the Inflection
The labor market could be characterized as showing decelerating improvement since the start of January this year. This week marks an inflection from that trend. The year-over-year change in NSA initial claims came in at -13.4% this week, the strongest print since January 3, 2014 and a moonshot compared with the -5.0% print last week. This week was so strong, in fact, that it brought the rolling NSA y/y to -7.1%, up from -3.5% last week. We'll see in the weeks ahead whether the trend is beginning to reverse. One of the arguments put forward in support of the generally weak 1QTD data has been weather. If weather is playing a role in suppressing the strength of the data then one would expect that as we move from the winter to the spring months we could reasonably expect to see improvement in the data. The next few weeks of data should be important in this regard, as they may serve to answer this fundamental question.
It's important to note that one of our favorite intermediate-term trade ideas on the long side is Capital One (COF). We initiated that call in late January on the basis that seemingly every year Cap One misses 4Q and crushes 1Q. We argued for buying it post the 4Q wash-out, holding it through 1Q14 results and exiting ahead of 2Q results. The claims data this morning is certainly supportive of that call. Almost all new loss content comes from newly unemployed people with the balance coming from divorce and illness (major medical expenses). Unsecured lenders like Capital One are hugely correlated with initial claims data, and claims tend to lead the fundamentals by ~13 weeks giving some visibility into what's coming down the pike. It didn't hurt, either, that COF got the Fed's stamp approval for its robust capital return program last night through CCAR.
Prior to revision, initial jobless claims fell 9k to 311k from 320k WoW, as the prior week's number was revised up by 1k to 321k.
The headline (unrevised) number shows claims were lower by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -9.5k WoW to 317.75k.
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 improvement versus the previous week's YoY change of -3.5%
The 2-10 spread fell -10 basis points WoW to 225 bps. 1Q14TD, the 2-10 spread is averaging 240 bps, which is lower by -1 bps relative to 4Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT