July 19: Jobless Claims Show Reverse in Trend

The weekly Jobless Claims data this morning completely erased the strong gains from last week and then some, which makes one wonder about the underlying health of the U.S. labor market. But irrespective of how one interprets the week-to-week volatility in this series, all agree that the economy has downshifted materially, and that negative trend is showing up in the economic numbers.

I described last week’s Jobless Claims report as “dramatically positive” when it showed a 26K drop. And the only appropriate way to describe today’s reading would be to call it "dramatically negative" as it shows a jump of 34K to 386K. Hard to tell whether last week’s reading was the outlier or this week’s was, but the picture emerging from this level of volatility is not inspiring.

The four-week average, which smooths out the week-to-week volatility, dropped by 1500 to 375.5K. Hard to make sense of these numbers, but seasonal factory closings in the auto sector when the automakers adjust their factories for next year’s models could be at play here.

Bernanke was non-committal in his Congressional testimony this week, but many in the market continue to hope that another round of QE may not be that far off. Labor market readings along the lines of what we saw this morning will only feed those expectations. But QE hopes may not be the only reason for why stocks have been showing signs of life lately.

The corporate profitability picture may be as grim as many of us had started suspecting. The earnings growth numbers don’t look very impressive, but what matters more is how the earnings and revenue numbers look relative to expectations. Importantly, the market has been particularly concerned about what management teams see for the coming quarters. And on those fronts, the reports we have seen thus far are not materially weaker than what we saw in the first quarter.

Admittedly, this is still in the early-going, as more than 80% of earnings reports have yet to come, but corporate profits are not falling off the cliff. We saw this with IBM (IBM) and Intel (INTC), bellwethers for tech spending, and also banking giants J.P. Morgan (JPM), Wells Fargo (WFC) and Citigroup (C). That said, top-line gains are getting hard to come by due to the synchronized global economic slowdown and the dollar strength is having a material impact on companies with substantial international exposure.

Today’s economic releases include Leading Indicators which is expected to decrease by 0.1% and Existing Home Sales, both of which are scheduled for release at 10:00 AM EST.