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June 28th, 2012

Initial jobless claims fell more than expected in the June 23 week, but only after a sizable upward revision brought the June 16 week’s level to the highest this year. As that week’s claims count coincides with the week in which the latest household employment survey was taken, dealers expect little improvement in the U.S. labor market for June. Indeed, several dealers have already revised their NFP forecasts lower on the heels of the latest jobless claims print.

For economists at J.P. Morgan North America Economic Research, the Thursday morning data did little to change their view that the U.S. economy is “treading water, expanding at a pace a little below trend. All in, the soggy trend in the claims data gives little reason to expect a vigorous snap-back from the dismal May jobs report.” Meanwhile, Morgan Stanley Research regarded the prior week’s upward revision as sufficient condition to weaken their employment growth estimate forecast. “The 4-week average now shows a 12,000 rise from the May survey week to a six-month high, with the negative revision suggesting downside risks to our +90,000 June nonfarm payrolls forecast.”

Deutsche Bank Global Markets Research stated, “The recent rise in claims has been troubling to us, but it is important to note that claims are still significantly lower than they were in either 2010 or 2011 at similar points in the year (475k and 423k, respectively). We would need to see claims rise substantially above 400k on a sustained basis before we would become appreciably concerned about H2 growth prospects. Today’s data confirm that labor market growth remains positive and we continue to expect +75k on headline payrolls (+90k private) and no change in the unemployment rate (8.2%) for next Friday’s June employment report.” Barclays Research is running slightly below the current NFP median (+90k total, +100k private). So far in Q2, initial claims have risen off the lows in February and March, and this has been consistent with the weaker payroll growth in April and May. We expect the moderation in the labor market recovery to continue in June, with a 75k expansion in nonfarm payrolls and an increase of 85k in private payrolls; we look for an unchanged employment rate of 8.2%.”

FT Advisors said of the latest jobless claims data, “These figures and other figures suggest June nonfarm payrolls will be up 55,000 and private payrolls up 65,000. (Data next week from Intuit and ADP may alter these forecasts).” Interestingly, FT had previously submitted forecasts of 45k total and 55k private job growth for June. The firm said the change in continuing claims relative to the prior survey period was better than expected and “takes some of the edge off our below-consensus NFP view.” FT is with the consensus, however, on June’s unemployment rate call (e: 8.2%).

Economists at RDQ Economics believe the move up in claims’ four-week average from late May to late June signals a slightly faster rate of layoffs. “There is no evidence of a pickup in the rate of job creation from the slowdown seen from February to May.” As well, they caution against noise in the data over the next few weeks that may give a false impression of an improving employment conditions. “In early July, the level of claims is often distorted by factory shutdowns (primarily in the auto industry) for retooling. It appears that there are plans for fewer shutdowns in the industry this year, which could lead to a drop in initial claims in early July that would have little to do with the underlying state of the labor market.”

Economists at International Strategy & Investment have revised down their payroll employment estimate from +125k to +100k in part due to higher claims. They see good-producing industries adding 30-40k to June payrolls, split roughly between manufacturing and construction trades. With financial services and information contracting, however, ISI sees job gains in private service-producing industries limited to only 50-70k. Meanwhile, ISI’s Fed watchers believe that if June and July employment reports are indeed weak, then “Bernanke could provide an indication at Jackson Hole of what the Fed might do at the September 12-13 meeting, more or less like he did in 2010 ahead of QE2.”

For RBS Securities, the elevated four-week moving average (386,750, up 5.7% compared to three months ago) “accords with our view that the pace of layoffs has picked up moderately. However, in our opinion the pickup in layoffs is insufficient to entirely explain the recent softness in nonfarm payrolls, and we believe that much of the latter has come from the hiring side. Indeed, the Job Openings and Labor Turnover Survey for April (released last week) showed a noticeable decline in both hiring and job opening rates. Thus, we are inclined to believe that most of the labor market deterioration seen in recent months should be attributed to a pullback on hiring and recruitment, probably due to growing uncertainty about the US and global economies.” For the June employment report, RBS expects nonfarm payroll growth of 110,000 (120,000 on private payrolls) and an unchanged unemployment rate at 8.2%.”

JEF Economics cautioned, “Indications are that the labor market is still stagnant.” The firm expects claims will hover in a 370K to 390K range for the next several weeks “until business confidence improves and the uncertainty generated by Europe and Washington begins to clear.” Although the fixed income research team at Jefferies & Co. expects that extended benefits rolls will continue to decline substantially over the course of the rest of the year, they are disheartened by the fact that the trend toward lower regular claims that was going strong earlier in the year has completely stalled. As such, they’re looking for June to be another month of sub-par payroll growth but with a stable unemployment rate. “Today’s data offer very little encouragement that the lull in the labor market is coming to an end and, rather, suggest that sluggish hiring may persist. Claims remain marginally below the highest level of the year, and the continued upward revisions to prior weeks’ data and the stickiness in claims is discouraging. The labor market has hit a plateau and will not likely improve substantially until a positive catalyst from Europe, Washington, or other areas of the economy emerges. This fact is not lost on the FOMC. The recent stall was probably a contributor to their reasoning for continuing Operation Twist after the June 19-20 meeting and if there is no improvement over the next few months, it will lead to further accommodation, probably an outright QE, late in the year.”

BNP Paribas Securities remarked that while some of the recent weakness in employment growth is seasonal, “In the absence of a solid pick-up in hiring, the trend in jobless claims suggests that the risks for a weaker employment print in June have increased and the underlying pace of employment growth has softened.” BNP also sees a conditional monetary policy response. “The Fed explicitly stated that they need to see ‘sustained improvement in labor market conditions’. Otherwise, they are prepared to take further action.”

With ISM PMI and NMI as well as ADP and Challenger layoffs data coming up next week, dealers will no doubt make further tweaks to their June payrolls and unemployment rate forecasts. Expectations are already running low and dealer forecasts seem more susceptible to downward revisions than to upward ones.

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