Trade War Escalation Overshadows Labor Data

 

Trump Ups the Ante

Just as volatility in financial markets began to subside with the hopes that trade negotiations between the US and China would eventually progress, yesterday evening President Trump announced that he was considering an additional $100 billion of Chinese import tariffs to account for Beijing’s “unfair retaliation.”  Trump specifically mentioned the adverse impact that China’s recently announced tariffs would have on the US agriculture industry and stated he would be working with the Agriculture Secretary to develop a plan combat the effect.  To the surprise of few, officials in China were not pleased with the tripling of the tariffs threatened by the US.  Chinese Commerce Ministry spokesman Gao Feng was direct in his response, explaining that “China is fully prepared to hit back forcefully and without hesitation,” and the measures to be potentially used “don’t exclude any options.” 

 

 

As expected, global financial markets sprinted into risk-off mode with the heightened threat of trade wars, especially after Treasury Secretary Steven Mnuchin advised that the level of risk could worsen.  Major US stock indices declined more than 2% on the day, with the industrial sector posting the largest losses.  Treasurys rallied from the open, with yields/swap rates falling 3-7bps across the curve in a bear-flattening pattern and bringing the yield on the 10-year note below 2.78%.  The US dollar declined with the ongoing tariff dispute, dropping 0.2% against major currencies.  Gold futures benefited from the flight to safety, rising 0.6% to $1,336/ounce.

 

 

Mixed Jobs Data

The headline number of the Labor Department’s employment report for March was weaker than expected as 103,000 jobs were added on a seasonally adjusted basis (+185,000 e), alongside a 50,000 downward revision to the prior two months figure. However, the wage growth and unemployment data reported in the release helped to mitigate the market’s negative perception of the data.  The largest monthly swings in payrolls were observed in the construction (-15,000) and retail (-4,000) sectors, where gains in the February totaled 61,000 and 50,000, respectively.  The unemployment rate held at a 17-year low of 4.1% for a sixth consecutive month while the average hourly earnings improved 0.3% (+2.7% YoY).  Other positives in the report included the underemployment rate (U-6) at 8.1% (near 11-year low) and a 62.9% labor force participation rate.  Overall, the slowdown in payroll growth (a portion of which was attributed to the inclement weather in the Northeast) during March is not expected to alter the Fed’s projected path for two additional rate hikes in 2018, as the pickup in wage gains provided the necessary evidence of a tightening labor market.

 

 

Powell Does Little to Ease Market Anxiety

Today investors were also treated to words from Fed Chairman Jay Powell, who spoke at The Economic Club of Chicago early this afternoon.  Highlights of his comments included:

• “The absence of a sharper acceleration in wages suggests that the labor market is not excessively tight” – in response to today’s labor data
• “As long as the economy continues broadly on its current path, further gradual increases in the federal funds rate will best promote these goals” – speaking on the Fed’s anticipated hike schedule
• “We did hear from a number of business leaders around the country that changes in trade policy had become a bit of a risk.  Tariffs can push up on prices.” – answering a question on the ongoing trade war threats