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Do last week’s economic releases support the Fed’s tapering stance?

Part 9
Do last week’s economic releases support the Fed’s tapering stance? (Part 9 of 10)

Initial jobless claims increase: Has the downward trend begun?

The initial jobless claims report

The weekly initial jobless claims report was issued on Thursday, March 20 by the U.S. Department of Labor: Employment and Training Administration.

Part 9Enlarge Graph

What are weekly initial job claims?

Weekly initial job claims is an indicator that measures the number of persons filing for unemployment insurance for the first time. An increase in initial claims usually implies more people are applying for first-time unemployment insurance, and usually, a deterioration in the jobs market which may be accompanied by a slowdown in economic activity. A decrease in initial claims means the opposite.

What did last week’s reading indicate?

Initial jobless claims increased by 5,000 to a seasonally-adjusted 320,000 for the week ended March 15, compared to a 9,000 decrease in the figure the previous week to 315,000. The number came lower than the consensus estimates of about 325,000 claims. The four-week moving average was also down by over 11,000 since February 15, dropping for the third consecutive week to 327,000, the lowest level since November 30, 2013, and may be the beginning of a downward trend.

Implications

The job market is influenced by a number of economic indicators. Even the better than expected increase of 175,000 in non-farm payrolls for February 2014, actually resulted in the unemployment rate increasing from 6.6% to 6.7%, due to an increase in the participation rate. So, it is too soon to tell whether the employment situation has genuinely improved.

The initial jobless claims release will have little impact on debt markets and ETF s like the iShares 10-20 Year Treasury Bond (TLH) ETF and the iShares 20+ Year Treasury Bond (TLT) ETF, which invest in long-term Treasury securities. This is because, as a weekly release, it is subject to short-term fluctuations in the labor market and is also frequently revised. It can sometimes be useful in identifying underlying labor market trends using the four-week moving average. The monthly increase in non-farm payrolls is a more influential labor market indicator with regard to financial markets.

This means corporate Bond ETFs like the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) ETF are also unlikely to be affected by the initial jobless claims release. LQD tracks the iBoxx $ Liquid Investment Grade Index, which provides a broad representation of the U.S. $-denominated liquid investment grade bond market in the U.S. Top ten holdings in LQD include Verizon Communications at 6.55% (V) and Apple at 2.4% (AAPL).

Part 10 is about an indicator that may have important implications for the Fed funds rate.

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