This week we want to take a step back from the high frequency claims data and take stock of where we are in the cycle, and consider what policy tools the Fed has at its disposal.
Where are we in the cycle? As the chart below shows, we're now in month 23 of initial jobless claims running at a sub-330k level. The last 3 cycles have seen the expansion last 24, 45 and 31 months at a sub-330k level, with an average of 33 months. Coupled with the slew of weak economic data coming from the industrial/manufacturing/energy side of the economy, we think it's a better than bad bet that economic contraction isn't far away.
What can the Fed do about it? We think the cycle being late warrants asking the question: What can the Fed do? The table below shows that the Fed's average response to the past seven recessions has been a -750 bps rate cut. However, it is facing a significant shortfall in its accommodative ability with the Fed Funds rate currently sitting at around 0.36%. In other words, it's one and done to get back to zero, and then it's QE or NIRP. As we show at the end of this note, the yield spread is already at a post-crisis low (108 bps), which is ratcheting up the pain for banks. 2016 was supposed to be the year when this pressure finally turned tailwind, but instead it's increasingly looking like the opposite is the most probable course for 2016 and beyond.
Meanwhile, the three charts below show that claims in energy states continue to grow, rising most recently at a +14% year-over-year rate.
Initial jobless claims fell 7k to 262k from 269k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -8k WoW to 273.25k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -2.9% lower YoY, which is a sequential improvement versus the previous week's YoY change of -1.5%
The 2-10 spread rose 10 basis points WoW to 108 bps. 1Q16TD, the 2-10 spread is averaging 114 bps, which is lower by -22 bps relative to 4Q15.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT