Jobless Claims - Stocks Give Back Early Gains
Before getting into Jobless Claims, let's review the week thus far. After a horrid start to the week, it looked like Wednesday would have solid gains heading into the Thanksgiving holiday.
However, stocks fell in the afternoon which limited their gains. The Dow fell 0.95 of a point. Interestingly, the Dow had been on an 8 day streak where it moved triple digits. The S&P 500 eked out a small 0.3% gain.
Tech and small caps outperformed. Nasdaq increased 0.92% and the Russell 2000 increased 1.31%. VIX fell 7.47% to 20.80.
Even though the market barely gained back much of its recent losses, the CNN fear and greed index increased from 7 to 13. That still indicates extreme fear.
Worst sectors were utilities and consumer staples which fell 1.48% and 0.83%. This is a reversal from the recent trend where the defensive names and the value stocks have outperformed growth stocks.
The best example of this trend was that on Tuesday, Facebook had a lower PE multiple than P&G. Best sectors were energy and communication services as they increased 1.58% and 1%.
Jobless Claims Are Officially An Issue
It was correct to express modest concern over last week’s jobless claims report. 4 week moving average was increasing. The latest jobless claims report wasn’t great. A prior report was revised higher.
As you can see from the chart below, the last jobless claims report was revised from 216,000 to 221,000. And this week’s report was 224,000. This missed expectations for 215,000. It was above the highest estimate which was 220,000.
The key point to realize is there aren’t special factors which are pushing claims higher. This labor market is simply weakening which means the BLS report in 2 weeks will be weak.
4 week moving average increased from 216,500 to 218,500. 4 week moving average needs to be monitored extremely closely.
Keep in mind, that by the time the claims get above 300,000, the stock market will already be down 15% to 20%. Jobless claims work in tune with the stock market. Both stocks and claims are leading indicators.
This report had the first back to back increase in jobless claims in 16 weeks. 4 week moving average is the highest in 18 weeks. Continuing claims have also been increasing. In the week of November 3rd they increased 40,000. And, in the week of November 10th, continuing claims fell 2,000. But the 4 week average increased 16,000 to 1.453 million. The unemployment rate for insured workers stayed at 1.2%.
Jobless Claims - Treasury Market & The Fed
The 2 year yield was up 1 basis point to 2.81% and the 10 year yield was flat at 3.06%. This means the difference between the 2 fell to 25 basis points.
In the past few days, the difference has stayed around that level. It’s surprising to see the yield curve not invert yet given the economic weakness late in the cycle.
On average, it takes over one year from when the curve inverts until the next recession. If the curve inverts in the next few months it will support the thesis for a 2020 recession.
A recession is looking likely as economic data points like housing have shown weakness.
The 10 year yield has been falling because inflation estimates are falling along with oil prices. If real yields fall, there will be an inversion.
Another way to get an inversion is if the 2 year yield makes new cycle highs. The Fed could facilitate this by hiking rates in December and twice in 2019.
There is currently a 74.1% chance of a hike in December. This is a big decision. Fed will be hiking rates into a slowdown which doesn’t look like it’s ending anytime soon.
When reading analysis on this decision, it’s important to recognize that the slowdown isn’t going to reverse if the Fed doesn’t hike rates.
Regardless of whether the Fed hikes, its hawkish policy is already hurting growth. This is along with the other negative catalysts I have been discussing in previous articles.
As you can see from the chart below, the Fed is expected to hike rates about 55 basis points more this cycle.
Other important information this chart shows is the market expects the Fed to stop hiking rates by the end of 2019. It’s interesting because the Fed hasn’t had many discussions on the end of rate hikes.
It’s simply implied by the long run interest rate target. Some Fed members expect rates to get slightly above that target. However, the target may be too high. The economy slowed in the 2nd half of 2018 even though rates are much below the long run target.
Current rates are from 2.00% to 2.25%, while the long run target is 3%.
Jobless Claims - Leading Indicators Meet Estimates
Leading indicators were up 6.2% year over year. This signals a recession won’t be here in the near term. However, the latest report was from October. That’s lagging data.
The stock market and jobless claims have been weak in November. That signals the growth in this index has likely peaked.
October report met estimates for 0.1% month over month growth. September report was revised higher from 0.5% to 0.6% growth.
As you can see from the chart below, unemployment claims, ISM new orders, the S&P 500, and building permits are seeing worsening trends.
The leading credit index, interest rate spread, and consumer expectations for business investment showed improving trends in October. But I expect they will all flip lower soon.
Jobless Claims - ECRI Leading Index Craters
The leading index looks fine in October. However, the ECRI leading index from the week of November 16th looks terrible.
As you can see from the chart below, year over year growth fell to -3.7%. This is a 141 week low.
As comparisons get tougher for the next couple months, growth will slow further. I trust this forward looking index much more than the leading indicators from October.
ECRI has been predicting a slowdown for over one year, while the leading indicators still don’t show any sign of trouble yet.
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