The improvements in the jobless claims numbers over the past few weeks have remained amid fears that the slowdown in the energy industry would see a flood of new jobless claims in the Western United States. Contrary to common sense, even though these regions are witnessing an acceleration in the growth of new claims, it has been allegedly offset by job creation in other states. After oil production fell 1.20% last week, expect claims in oil services sector to continue rising as the industry hemorrhages jobs amid the weakening energy outlook. Nevertheless, initial jobless claims will be a key determinant in the Federal Reserve’s choice of interest rate policy. Along with unemployment, the next most important factor being monitored aside from inflation is equity valuations. Fed Chairwoman Janet Yellen has spoken to the overvaluation evident in equity markets for which raising interest rates might be the first step in cooling the bubble.
Benchmarks like the Dow Jones Industrial Average and S&P 500 are broad barometers of the economy and future expectations. They also serve a key benchmark by which households judge their wealth, making them extremely important from a policy perspective. Although the FOMC Meeting Minutes yesterday opened the door to a possible interest rate hike in June, if it happens, it will likely be both token and ceremonial, meaning not a normal 0.25% step, but something smaller, perhaps 0.05%. Raising rates would immediately see a substantial correction lower in equities while the dollar would likely surge higher on a move towards more normalized interest rate policies. While the drop in unemployment claims to near 15-year lows and the average hovering near 40-year lows, the stage might be set for such a move to shift policy in June or September. With the broader trend in unemployment lower despite the drop in labor force participation, the Federal Reserve has opened the door as far as possible to any number of scenarios including an earlier than expected hike.
Initial Jobless Claims Trend Improves Further
Market Trends - 21/05/2015