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Takeaway: Q: How can you tell when the cycle is turning? A: Rate of Change.

At this point in the cycle, we're less interested in the degree to which jobless claims are improving; rather, we're increasingly focused on any signs of claims beginning to negatively inflect. Here are a few different ways to think about how to evaluate the data for those signs.

First, one can simply look at the rolling trend (4-wk rolling average) in SA claims. Over the intermediate term (YTD) it's been steadily trending lower, while in the short-term (Last 3-4 months) it's been moving sideways. Looking back to 2007, by comparison (recall the S&P peaked in October 2007), rolling SA claims were trending higher by the October/November 2007 timeframe. We illustrate this in the first chart below. In blue we show the rolling SA claims with a second order polynomial trendline to illustrate the acceleration in claims in the fourth quarter. Claims had been running sideways between ~310k and 330k until week 43, when they broke above 330k and never looked back. That was late October, 2007. By comparison, the green line shows the 2014 trend.   

Second, one can look at the Y/Y rate of change in the rolling NSA data. The data inflected to positive 7% Y/Y rate of change (rising claims) by November, 2007 suggesting that the labor market was already showing early signs of deterioration, less than one month after the peak in the market.

We'll be keeping a close eye on the data for any signs of the beginning of the turn in the credit cycle.

Jobless Claims - 2014 vs 2007 - 07 vs 14

 

The Data

Initial jobless claims fell 3k to 294k from 297k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 0.25k WoW to 299.25k.

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.0% lower YoY, which is a sequential improvement versus the previous week's YoY change of -7.2%

Jobless Claims - 2014 vs 2007 - 2

Jobless Claims - 2014 vs 2007 - 3

Jobless Claims - 2014 vs 2007 - 4

Jobless Claims - 2014 vs 2007 - 5

Jobless Claims - 2014 vs 2007 - 6

Jobless Claims - 2014 vs 2007 - 7

Jobless Claims - 2014 vs 2007 - 8

Jobless Claims - 2014 vs 2007 - 9 

Jobless Claims - 2014 vs 2007 - 10

Jobless Claims - 2014 vs 2007 - 11

Jobless Claims - 2014 vs 2007 - 19

<chart14>

Yield Spreads

The 2-10 spread fell -12 basis points WoW to 160 bps. 4Q14TD, the 2-10 spread is averaging 181 bps, which is lower by -18 bps relative to 3Q14.

Jobless Claims - 2014 vs 2007 - 15

Jobless Claims - 2014 vs 2007 - 16

Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT