How will consumption shape investments after the payrolls report?

Part 7
How will consumption shape investments after the payrolls report? (Part 7 of 12)

Why key jobs releases affect companies like Chipotle and Wendy’s

Initial jobless claims

The weekly initial jobless claims report for the week ended March 29 will be issued on Thursday, April 10, by the U.S. Department of Labor’s Employment and Training Administration.

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What are weekly initial jobless claims?

Weekly initial jobless claims are an indicator that measures the number of people filing for unemployment insurance for the first time. An increase in initial claims usually implies a slowdown in economic activity, whereas a decrease in initial jobless claims means the economy is growing.

What did last week’s reading indicate?

Initial jobless claims increased by 16,000 to a seasonally adjusted 326,000 for the week ended March 29, the highest level in March 2014 and an 11,000 decrease compared to the previous week’s revised figure of 310,000. However, the four-week moving average has trended downwards by over 18,000 from March 1 to March 29.

The importance of JOLTS and initial jobless claims

While the JOLTS and initial jobless claims reports offer valuable economic data to assess labor market trends, they have limited importance—JOLTS because of the time lag in its release and initial jobless claims because of the volatility inherent in a weekly measure. The monthly increase in non-farm payrolls is a more timely release that overcomes some of the limitations of the JOLTS and initial jobless claims reports. For this reason, analysts consider it more important.

The increase in non-farm payrolls for March came in at 192,000—slightly lower than the consensus estimates of 200,000. Industries adding jobs included food services and drinking places (+30,000), healthcare (+19,000), and construction (+19,000). The PowerShares Dynamic Food & Beverage Portfolio (PBJ) invests primarily in the food and beverage sector in the U.S. Its holdings include fast food chain Wendy’s (WEN), with 2.48% of the ETF’s assets. Another fast food chain, Chipotle Mexican Grill (CMG), which reports Q1 earnings on April 17, has expanded aggressively in 2013, opening 185 restaurants. CMG plans to open over 180 new restaurants in 2014. Construction company ETFs like the iShares US Home Construction ETF (ITB) have benefited from the boom in residential construction. ITB has increased over 13% from January 2, 2013, to April 4, 2014.

Implications for fixed income investors

Fed chair Janet Yellen has indicated that the Fed will consider a “dashboard” of labor market indicators before revising the base rate from the current unprecedented low levels. The Fed has also indicated that a revision is unlikely before Q2 2015. While this would keep rates low at the short end of the yield curve, affecting ETFs like the SPDR Barclays 1-3 Month T-Bill (BIL), maturities at the long end of the curve might face upward yield pressure, as yields usually increase during an economic expansion. One way investors can benefit from rising rates is by investing in floating-rate ETFs like Market Vectors Investment Grade Floating Rate ETF (FLTR). As interest rates rise, these ETFs will benefit, as their interest rates aren’t fixed but are benchmarked to a reference rate and reset at periodic intervals.

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