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Initial Claims Fall 27k Last Week - Progress to be Sure

Initial claims fell 27k last week to 451k (falling 21k net of the revision).  Rolling claims came in at 478k, a decline of 9k over the previous week. Reported claims have moved to the low end of the YTD range of 450-470k that the series has occupied for all of 2010, while rolling claims remain on the high end of the range. This is a big step in the right direction.  Ultimately, we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

This being said, the reality is that we've seen two better than expected data points in the last two days: yesterday mortgage applications were up 6.3% and today jobless claims were down 27k. For investors interested in how best to play a short-term sentiment reversal on the long side, the table below shows Financial subsector performance over multiple periods. Investors interested in beta exposure may want to consider those subsectors near the bottom of the column on the far right as these are the highest beta names that have come under the most significant pressure since the April 14 high in the XLF.

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Short term rallies notwithstanding, our firm remains of the view that US economic growth is slowing markedly between now and into 2011. We think this will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.

In the table below, we chart US equity correlations with Initial Claims, the Dollar Index, and US 10Y Treasury yields on a weekly basis going back 3 months, 1 year, and 3 years.

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As a reminder, May was the peak month of Census hiring, and it will continue to be a headwind through the end of the month as the Census winds down.  After September, it should mostly cease to be a factor. 

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Joshua Steiner, CFA

Allison Kaptur