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Initial Jobless Claims, Bernanke, & S&P 500® Index

03/29/2012

For the week ending March 24, 2012, initial jobless claims fell by 5,000 to 359,000. The decline was actually less than anticipated. Analysts were expecting initial jobless claims to fall to between 345,000 and 350,000.  This is, in fact, the lowest level for initial jobless claims since April 2008.
 
Let’s take a look inside the report. . .
 
•  The prior week’s figure was revised higher to 364,000 from the previously reported 348,000
•  The four-week moving average (Figure 1.1) is now at 365,000, down from last week’s 368,000
•  Continuing claims fell by 41,000 to 3.34 million
•  Those receiving extended benefits fell by 79,000 to 3.24 million
•  The unemployment rate among those eligible for benefits fell to 2.6% from 2.7% last week 
 
Also reported today – Business Roundtable’s economic outlook (CEO confidence) index rose to 96.9 in Q1 from Q4 2011’s soft 77.9.
 
Investors should begin to anticipate the upcoming U.S. Labor report to be released on Good Friday, April 6, at 8:30 a.m. With only the futures markets open that morning, it will be difficult to trade the release. Expectations for the report are as follows:
           
•  Private sector job growth unchanged from last month’s 233,000 – estimates 225,000 to 235,000
•  Headline figure down slightly from last month’s 227,000 – estimates 210,000 to 225,000
•  Unemployment rate down from last month’s 8.3% to 8.2%
•  ADP’s relevancy next week has been raised. On Wednesday, April 4, the ADP employment change will be reported. With the markets closed on Good Friday, money managers might make anticipatory moves based on Wednesday’s figure.
 
Over the past few days, FOMC Chairman Ben Bernanke has been actively downplaying the improvement in the U.S. economy. I suspect Chairman Bernanke is trying to prepare FOMC hawks and the market that he is not abandoning his accommodative stance anytime soon. Unfortunately, it is not as simple as it has been over the past 36 months. The challenge now is that deflation has disappeared and there is an improvement in U.S. labor conditions. The decision is no longer black and white; there is plenty of gray. Chairman Bernanke will champion the tepid growth, expectations for lower Q1 GDP at 2%-2.5%, and the lack of recovery in home prices. I expect that ahead of June’s end to Operation Twist, Chairman Bernanke will use any misstep in the U.S. Labor report to adopt a platform for further QE. Although I remain consistent in my belief that QE3 is unnecessary and will have negative market consequences, I suspect Bernanke will formulate a program to support the mortgage security market at a minimum.
 
Finally, the S&P 500 Index (Figure 1.2) is enjoying one of its best quarters since 1998. In the wake of the China one-day correction last week, I suggested to fade the correction for an end of quarter run-up. I suspect that run-up found its peak Tuesday, March 27, at 1419.15. What happens next depends mostly on the upcoming earnings season and secondarily next Friday’s U.S. Labor report.  The long-standing May 2, 2011 “Bin Laden” high at 1370.58 should now provide support for the market. Corporate bonds, technology, consumer names, and small caps remain the sources of opportunity to look at first on any correction. For those seeking a more aggressive defensive stance, utilities are attractive.  
 
Figure 1.1 Initial Jobless Claims 4-week moving average, April 2008 - Present

Source: Bloomberg
 
Figure 1.2 S&P 500 Index past 52 weeks

Source: Bloomberg
 

 

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.