Treasurys Rally After Mixed Payrolls Report, Escalating Trade Concerns

 

Headline Payrolls Disappoint, But Revisions Show Strength

Today the Labor Department released its comprehensive employment report for July, displaying mixed results among the various components.  The headline nonfarm payroll number failed to meet expectations, coming in at +157k vs. estimates of +193k.  However, June’s figure was upwardly revised by 35k (from +213k to +248k), and the total net revision for the prior two months came in at +59k.  The revisions, coupled with July’s number, brought the three-month average number of payroll additions to +224k, confirming the existing strength in the job market.

 

 

Another positive in the report, the unemployment rate declined to 3.9%  from 4.0% (matching expectations), alongside a decrease in the U6 (a measure of underemployment or “real” unemployment) from 7.8% to 7.5%.  In addition, the labor force participation rate held steady at 62.9%.  However wage growth continues to be a challenge for the economy, with average hourly earnings increasing 0.3% MoM, meeting estimates. In the prior month earnings were revised down 0.1%, from 0.2% to 0.1%.  As a whole this was a mostly positive report, but nothing in the report would indicate that the FOMC would deviate from its current course of gradual rate hikes.

 

 

Chinese Trade Retaliation

The Commerce Ministry of China did not back down from the Trump Administration’s threat to more than double the tariffs on $200 billion worth of Chinese imports.  “China has been fully prepared and will have to retaliate to defend national dignity and the people’s interests,” Chinese trade officials stated on Thursday evening.  Further accelerating the rhetoric, a statement from China’s cabinet earlier today announced the intention to impose import duties on $60 billion worth of US products, at rates ranging from 5%-25%.  According to the Chinese Commerce Ministry, “any unilateral threat or blackmail will only lead to intensification of conflicts and damage to the interests of all parties.”

 

 

In reaction to the escalating tariff tiff, investors have continued to bet on the depreciation of China’s currency (drawing criticism from market pundits who believe the Chinese government is purposely facilitating this depreciation).  This morning the Chinese yuan approached 7 CNY/$ (-1%), which is a level that hasn’t been seen in more than a decade.  Additionally, the yuan posted its eighth straight week of losses – the nation’s longest such streak since 1994.

 

 

Equity Markets End Week in the Black

On the back of a generally positive employment report  all three major indices posted gains on the day.  The DJIA leading the way posting the best gains on the day (+0.54%), followed closely by the S&P 500  which posted a respectable gain of +0.46%, while the NASDAQ closed with a more modest gain of +0.12%.  US Treasurys rallied on the day with rates lower 2-4bps across the curve.  The 10-year Treasury note closed the day at a yield near 2.95% (-4 bps).  WTI crude futures settled 0.4% lower at $68.67/barrel, down on concern over trade tensions with china and resulting lack of demand.  In foreign exchange markets, the USD Dollar (USD) rose 0.1% against both the British Pound (GBP) and the Euro (EUR).