Treasurys Selloff as Employment Data Impresses

 

Wage Growth Finally Joins the Party

Today the Labor Department released its comprehensive employment report for August, displaying robust results across most sectors.  Looking at nonfarm payroll growth, a 201,000 increase in jobs was recorded, which beat estimates of +190,000 and presented a strong rebound from the prior month’s downwardly revised +147,000 level.  Hiring was strongest in professional and business services (+53k), trade and transportation (+37k) and construction (+23k), while the manufacturing sector unexpectedly reported a 3k contraction in jobs.  Over the past quarter, the US economy has added a healthy average of 185,000 jobs per month.

 

 

The primary unemployment rate remained unchanged at 3.9%, slightly missing expectations of 3.8% albeit still well below the Fed’s official 4.5% target level.  A broader measure of the jobless rate, the underemployment rate, declined to a 7-year low of 7.4%.  Another lens on the employment picture, the labor force participation rate (% of Americans working or looking for work), ticked marginally lower to 62.7% — near where it has been over the past few years.

 

 

In the end, it was wage growth that stole the show.  After months of stubbornly low advances, average hourly earnings jumped 0.4% during August – significantly outpacing estimates of +0.2% and improving from +0.3% in July.  Compared to a year earlier, wages increased 2.9%, representing the largest annual increase since June 2009.  Leading up to this report, hourly earnings had been a laggard amongst otherwise robust economic growth metrics.  However today’s figure may prove to be the final domino solidifying the market conviction regarding another quarter point rate hike at the September FOMC meeting, and possibly at December’s meeting too. 

 

 

US Treasurys sold off sharply based on the positive economic data and increased expectation for two additional rate hikes in 2018.  Yields/swap rates climbed 5-9 bps across the curve, with the 10-year note yield finishing just below 2.94% — nearly 8bps higher than where it opened the week.  The US dollar gained 0.4% on the day against major currencies, fueled in part by the escalation in trade war uncertainty.

 

 

More Tariff Threats

The deadline to submit comments on the next round of Chinese import tariffs (~$200 billion worth of goods) officially passed this morning.  The Trump administration is now tasked with reviewing all of the submissions before making the decision to officially impose such tariffs or not – a process which could play out rather quickly.  White House economic advisor Larry Kudlow acknowledged that trade discussions were ongoing with China, but that meaningful progress in meeting US demands was still lacking.  Kudlow defined the needs of the US as “zero tariffs, zero non-tariff barriers, zero subsidies, stop the IP theft, stop the technology transfer, allow Americans to own their own companies”.  Adding fuel to the fire, this afternoon Trump revealed his readiness to levy tariffs on an additional $267 billion worth of imports “on short notice” following this round of $200 billion.  Between the already imposed tariffs and those being threatened, virtually all Chinese imports could end up being subject to this trade war umbrella.      

 

 

Speaking on the matter, today Dallas Fed President Robert Kaplan called the trade war with China the “right fight to pick” despite the potential for the conflict to last for months or even years.  “If it widens out though to more goods or goes on longer, we’ll (Fed policymakers) obviously reserve the right to revisit that and we will revisit it, ” Kaplan explained.  Concerning the trade uncertainty with Europe and Canada/Mexico, he stated his opinion that negotiations would be wrapped up in the short term.

Overall, the geopolitical uncertainty forced stocks lower on the day, with all three major equity indices finishing between 0.2% and 0.3% in the red.  Shares of Tesla (-6.3%) were amongst the largest losers after it was revealed that two key executives left the firm.  Tesla CEO Elon Musk didn’t help matters either – earlier today a video of Musk smoking marijuana while participating in a podcast interview went viral…adding to his riotous image magnified by the “am considering taking Tesla private at $420. Funding secured” tweet heard around the world just a month ago.