INITIAL CLAIMS POST ANOTHER STRONG PRINT / CAP ONE RESULTS & OUTLOOK

Takeaway: Claims continue to fall at an impressive rate, a precursor to a tight labor market and wage inflation. COF remains a prime beneficiary.

The Streak

The labor market put in another good week, bringing the series to four consecutive weeks of solid data. While a modest deceleration from last week on a single week basis, the rolling trend continued to sequentially accelerate. 

 

The year-over-year change in non-seasonally adjusted initial claims came in at -11.6% vs the prior week's 15.9% improvement and the previous week's 7.1% improvement. That brought the 4-wk moving average to -12.1%, as compared with -10.5% and -7.5% in the preceding two weeks. Remember, a more negative number is better as it reflects a faster rate of improvement. 

 

As we pointed out last week, the weather's turn, particularly in the Northeast, remains coincident with the turn in the claims data. Based on the numbers so far, it looks like the April job's report will come in quite strong.

 

Capital One (COF) Update

We liked Capital One into the first quarter results last night, predicated primarily on our expectation for strong credit driving larger-than-expected reserve release. The company did beat estimates, reporting $1.91 vs $1.69 consensus, but didn't release as much reserve as we were looking for and so came in well short of our $2.38 bogey. The revenue margin was also under pressure, and CEO Fairbank pointed out an obvious but important thing. When credit gets better, fewer people are late with their payments, and that creates a drag on non-interest income. As such, revenue margins, even though they benefited from revenue suppression reversal, were down sequentially. While the stock is narrowly green this morning amidst a modestly red tape, we were expecting better. We continue to think Cap One shares should outperform over the coming months as labor market tailwinds persist and we draw nearer to the back half of the year when loan growth in US card balances should again turn positive.

 

The Data

Prior to revision, initial jobless claims rose 4k to 304k from 300k WoW, as the prior week's number was revised up by 2k to 302k.

 

The headline (unrevised) number shows claims were higher by 2k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k WoW to 312k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.1% lower YoY, which is a sequential improvement versus the previous week's YoY change of -10.5%

 

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Yield Spreads

The 2-10 spread fell -6 basis points WoW to 226 bps. 2Q14TD, the 2-10 spread is averaging 230 bps, which is lower by -9 bps relative to 1Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT