Why US job claims matter to UK stock prices

What caused last week’s FTSE panic?

American dole queues could be partly to blame. Initial jobless claims for the last week in January were expected to fall. But they climbed by 8,000 to 480,000, suggesting the US economy is doing worse than was thought. In turn, that’s a bad sign for company profits – and suggests the rest of the world will soon be suffering, too.

Then, rather than increase by 15,000 as forecast, US ‘non-farm’ payrolls shrank by 20,000 last month, i.e. there were fewer people employed. But the jobless rate still fell to 9.7% in January from 10% in December. In addition, all the earlier numbers have been revised.

Confused? I was. So was the stock market.

With so much contrasting data, trying to analyse short-term jobless trends is a bit of a nightmare. And getting fixated on specific numbers is generally a waste of time.

But when the dust has settled, it’s still worth watching the US job scene – because it’s actually a handy stock market guide.

This Bloomberg chart makes the point.

First the simple bit – the blue line is the FTSE 100 index. Heading back down after the big rally from the March 2009 lows.

The red line is more complex, so please bear with me. It’s the four-week moving average, i.e. it’s a ‘smoothed’ measure, stripping out weekly swings, of US initial jobless claims. That’s the number of Americans who’ve filed for unemployment for the first time.

And on the chart, this has been inverted. In other words, the more claims there are, the lower the red line. For example, in the first quarter of last year the level topped 650,000. Then it fell back to 450,000, and now it’s rising again. 

When the government’s ‘stimulus’ measures run out, the prospects for US economic growth will look distinctly dodgy. So America’s jobless claims could rise much more.

What does this mean?

First, that long-term trends still make a lot of sense. More jobs = more prosperity = higher share prices. And vice versa.

And second, that it’s worth keeping a very close eye on that red line. If those US claims start climbing big-style, just watch the FTSE fall.