INITIAL CLAIMS - A POSITIVE REVERSAL

Takeaway: Labor gets its mojo back, reversing the weakness seen in the last two weeks.

Two Steps Back, One Giant Leap Forward

There's a reason why investors are often advised to look at 4-wk rolling averages when it comes to high-frequency economic data (i.e. weekly initial jobless claims). The last two weeks of data were conspicuously soft and we noted as much in our weekly look at the labor market, but this week was very strong. Notably, on a 4-week rolling basis, the data has been fairly steady.

 

Prior to a few weeks ago, the data had been running at a fairly steady rate of ~10% improvement year-over-year. That is to say, claims are lower by 10% this year vs. last. Two weeks ago, however, that rate of improvement slowed to 7% and last week claims actually rose by 2%. This week saw claims better by almost 12%, which puts them back on track with the rate of change seen throughout much of the summer.

 

We're still bullish on the credit card lenders (COF, DFS) as we think the combination of resurgent loan growth and stable credit quality will produce better than expected earnings and should expand the multiple on those earnings. So long as jobless claims are not flagging an inflection in the labor market trends, we're going to stick with this idea.

 

The Data

Prior to revision, initial jobless claims fell 35k to 280k from 315k WoW, as the prior week's number was revised up by 1k to 316k.

 

The headline (unrevised) number shows claims were lower by 36k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.75k WoW to 299.5k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -7.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

 

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Yield Spreads

The 2-10 spread rose 8 basis points WoW to 205 bps. 3Q14TD, the 2-10 spread is averaging 199 bps, which is lower by -21 bps relative to 2Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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