Thursday's softer-than-expected PCE deflator plays into the dovish market mood. There may be little that can resist it until next Friday's employment data, which should be another robust report with hourly earnings holding above 3% year-over-year. Last November, average hourly earnings rose by 0.3%. As this drops out of the year-over-year comparison, even a healthy bounce back from the 0.2% drop skewed by the hurricane will be needed just to hold the rate at 3.1%.
The weekly jobless claims report is the closest we get to real-time economic government data. The jobless claims during the week in which the nonfarm payroll survey is conducted was a few thousand higher than in October, but it is not inconsistent with nonfarm payroll growth of 180k-190k. Weekly claims have risen, though, for three consecutive weeks. The four-week moving average, used to smooth out the volatility, is at its highest level since July. The streak is the longest in over a year. One would expect the stock market to go in the opposite direction of weekly jobless claims. By definition, when the economy is strong, labor is being absorbed and consumption rises. Rising corporate earnings and profits help provide the fuel for equity-market gains.
The Great Graphic above shows the 26-week rolling correlation of the percent change of the S&P 500 and weekly initial jobless claims. The current inverse correlation (~-0.54) is the most extreme since the late 1990s. The blue bar chart to the right shows the distribution of the correlation. This is a tail event. If the inversion is to be reduced, the two must move in the same direction. I have a constructive outlook for the S&P 500, but also recognize that the weekly jobless claims have been skewed by weather and the Thanksgiving holiday. That said, jobless claims bottomed in mid-September and that could mark the cyclical low.
Weekly jobless claims are included in the Conference Board's Leading Economic Indicator, which rose by 0.1% last month, matching the year's low. Last year's low was set in September at zero. The low in 2016 was -0.3 in January. In October, three of the ten leading indicators were negative – jobless claims, building permits and equity prices.