Igniting a major rebound in US stocks! What does the overnight US jobless claims data reveal?

Overnight, the "good news" from the US Federal Reserve's job market eased concerns about a recession in the US economy, boosting investor confidence and driving US stocks higher, with the S&P rising over 2%, the best performance in nearly two years.

Specifically, in the week of August 3, initial jobless claims fell by 17,000 to 233,000, more than expected, with the four-week moving average rising by 3,000 to 241,000, hitting a new high for the year;

However, continuing claims remained high, rising to 1.875 million as of the week ending July 27, hitting a new high since November 2021, with the four-week average also reaching a new high.

Recent weak economic data in the US has increased concerns about a recession, and the better-than-expected initial claims have alleviated market concerns. What else does this data reveal?

Michigan Automakers Restart, Texas Hurricane Impact Subsides

The decrease in initial claims is attributed to the significant decrease in claims in several states that had previously seen large increases, with Michigan down by 8,000, Texas down by 6,000, and Missouri down by 4,000.

Goldman Sachs pointed out:

The decrease in Michigan claims may be related to the reopening of auto factories after the regular summer shutdown, as auto factories typically shut down for retooling in the summer. However, the exact timing and scale of the shutdowns vary each year, often leading to significant fluctuations in this data.

While initial claims for unemployment benefits in Texas have decreased, they are still about 5,000 higher than in early July, which may reflect the lingering impact of Hurricane Beryl.

Rising Continuing Claims Signal Greater Challenges in Job Search

Another point worth noting in this data is the continuous increase in continuing claims, which have been significantly rising since June, reaching a new high as of the week ending July 27.

J.P. Morgan pointed out:

Overall, the latest numbers have increased compared to March/April, but there hasn't been much change since June, which is inconsistent with a sudden weakness in the labor market.

However, the continued increase in claims may indicate that workers who have been laid off are facing greater challenges in finding new jobs.

Citi also believes that the steady rise in continuing claims indicates that the increase in the unemployment rate is not just incidental.

Have the Market and the Fed Underestimated Recession Risks?

Previously, the July non-farm payroll report was unexpectedly weak, with some Fed officials arguing that the rise in the unemployment rate may reflect weather, increased supply, or other benign factors. Chicago Fed President Evans and San Francisco Fed President Daly believe that the market's generally weak response to the July employment report was excessive.

However, Citi is less optimistic, stating:

Given that the Bureau of Labor Statistics claimed that Hurricane Beryl had "no discernible effect" on the data, attributing the weakness in July to weather is questionable. Indeed, the June JOLTS layoff rate remains historically low, but weak hiring and temporary layoffs are typical behaviors that occur before companies decide to make permanent layoffs.

Citi stated that if initial or continuing claims for unemployment benefits further increase, it would indicate that layoffs are actually increasing, and both the market and Fed officials may have underestimated the risk of an economic recession.