Battleships & Bathtubs
This week's initial claims data brings the "streak" of good news to three weeks, and almost a trend makes. Notably, this week's improvement is the strongest we've seen YTD. The year-over-year change in non-seasonally adjusted initial claims came in at -16.4%, a sharp acceleration vs the prior week's 7.1% improvement and the previous week's 13.2% improvement. That brought the 4-wk moving average to -10.7%, as compared with -7.5% and -7.1% in the preceding two weeks. Remember, a more negative number is better as it reflects a faster rate of improvement.
The weather has been a much-maligned scapegoat for softening labor data through the first 2-3 months of 2014. While we may never know the full extent of the role weather played, it stands to reason that if, in fact, weather was at least partly to blame for softness in Jan/Feb then we would expect to see improvement by late March/April, and that is exactly what we're seeing. Coincidence? Possibly, but it's worth considering. As my colleague Christian Drake, on our macro team, reminded me this morning: the labor market is a battleship and turns very slowly, but is subject to lots of short/intermediate term distortions. #Indeed.
Capital One (COF)
Our favorite way to play this rebound in the labor market remains Capital One (COF). We continue to think the company is poised to beat the quarter - they report next Thursday before the open - and the seasonal pattern of outperformance from late January to early July is strong. Unsecured consumer lenders like Cap One are high-beta plays on claims because with only nominal loan growth, stable margins and expenses the one lever the company has is credit, and claims has always been the best leading indicator for credit.
Prior to revision, initial jobless claims fell 26k to 300k from 326k WoW, as the prior week's number was revised up by 6k to 332k.
The headline (unrevised) number shows claims were lower by 32k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -3.75k WoW to 315.75k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -10.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.5%
The 2-10 spread fell -3 basis points WoW to 233 bps. 2Q14TD, the 2-10 spread is averaging 232 bps, which is lower by -7 bps relative to 1Q14.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT