Jobless Claims Fall To 216,000: Signaling Strong Labor Market

Jobless Claims - Inflation Expectations

In November, I started discussing how the Fed didn’t need to hike rates in December or in 2019 because inflation was cratering.

Now is a great time to be a worker because inflation is falling and wage growth is rising. The labor market is filling up which means many people are benefiting. This explains why retail sales were strong this holiday season.

The crash in oil prices played a major role in the decline in commodities prices. Even with this decline, the Fed went ahead with the December hike.

The Fed’s hawkishness last fall was partially responsible for the volatility in stocks. That could have been avoided if the Fed reacted quicker to the weakness in inflation.

Finally, in the Minutes from the December meeting, the Fed stated the modest inflation allows the Fed to be less hawkish.

As you can see from the chart below, the average Q1 year over year CPI forecast fell from 2.35% in early November to about 2.05% now.

The Fed was late to the party in expecting lower inflation. Fed might be late again as the Bloomberg CRB commodity ETF is up 5.18% year to date. It needs to increase much more to push up headline inflation, but that’s a start.

If inflation were to spike, we could see a modest stagflationary environment. It wouldn’t be anything like the 1970s-1980s, but it wouldn’t be ideal. The bull market from 2009 to 2018 lived off modest growth and low inflation.

Jobless Claims - Solid JOLTS Report: Ignore Negativity

Fears about the JOLTS report are wildly misguided. The labor market is strong. Most obvious way to prove this is the great December labor report. The JOLTS report is from November, so it will never be a leading indicator that will predict turns in the cycle.

If you want a leading indicator, look at the jobless claims report. The chart below shows the negative argument. Downturn in new hires is circled. However, it’s easy to see the numerous 3 month periods which were about the same as this.

JOLTS report showed there were 6.888 million job openings which was below the October report which showed 7.131 million. Good news is the prior report was revised from 7.079 million.

We know the labor market is strong because the difference between job openings and the number of people actively looking for work is still large at 870,000.

In December we saw a huge influx of workers coming off the sidelines. There are plenty of job openings available for them. The record difference between openings and those looking for work was 1.096 million last August.

Jobless Claims - Wage growth gets people off the sidelines and looking for a job. 

A difference between openings and hirings was 1.178 million which is below the peak of 1.387 million in August. Having a large gap isn’t a good thing as it’s better to have people hired than openings that go unfilled.

The number of quits fell from 3.519 million to 3.407 million which isn’t a good sign because in a strong labor market people quit their job to find a new one with better pay and more opportunities to grow.

Overall, this report showed very modest weakness, but the labor market is still great though.

Jobless Claims Remain Strong

As I mentioned previously, the jobless claims are low which implies the labor market is still strong.

Last week’s report was revised to 233,000 from 231,000. However, as you can see from the chart below, the latest report for the week of January 5th shows claims fell to 216,000.

This beat the consensus for 224,000. The 4 week moving average increased from 219,250 to 221,750 even though claims fell 17,000. The government shutdown is starting to affect the labor market.

In the latest claims report, there was a 3,831 weekly increase in claims filed by Federal employees. This is a very small uptick.

If claims spike because of the shutdown, we will know the private sector is still in good shape. GDP growth will also be modestly affected as some estimate 0.1% is shaved off growth every week the shutdown lasts.

Traders won’t think this a big deal assuming the government is re-opened soon. Continuing claims for the week of December 29th were down 29,000 to 1.722 million. The 4 week average increased 15,000 to 1.721 million. The unemployment rate for insured workers has been at 1.2% for 5 weeks.

Jobless Claims - Strong Target Holiday Season

Target was a big winner this holiday shopping season and Macy’s was a big loser. Target had same store sales growth of 5.7% and Macy’s had same store sales growth of only 1.1% this holiday shopping season.

This caused Target’s stock to fall 2.85% and Macy’s stock to fall a dramatic 17.89%. Investors had high expectations which is why even the winner fell.

Last year, Target had sales growth of 3.4%. This holiday season digital sales growth was 29%. The amount of online orders filled by either in-store pickup or curbside pickup was up 60% from last year. It was 25% of online sales this holiday shopping season.

Target still expects same store sales growth of 5% in Q4 with EPS of $5.30 to $5.50. 2018 should be Target’s strongest year for sales growth since 2005. I think Target’s stock peaked in September because investors know 2019 won’t beat last year’s results.

Macy’s lowered its expectations for 2018 same store sales growth from 2.3%-2.5% to just 2%.

Jobless Claims - Conclusion

Retail sales growth was strong this holiday shopping season. But department stores like Kohl's and Macy’s did terribly. Even Target, which reported great results, saw its stock fall.

The good news is the consumer isn’t weak. Online sales growth was strong. I expect Amazon to report amazing results.

Many brick and mortar retailers are dinosaurs which are dying out. It wouldn’t be surprising to see decent retail sales growth in Q1 2019 because the jobless claims are low, and inflation is low.

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