At midnight last night the tariffs on Chinese goods went into effect; the US and global markets were thought to be holding their collective breaths about a reaction. There really wasn’t anything noticeable in most every global market. US stock indexes prior to 8:30 am EST were trading higher, Asian markets including China were also better.
The movement in markets this morning is driven by the June employment data. Monthly employment data always has surprises; this time the news was more jobs and a less-than-expected increase in wages. More people are entering the employment markets than were thought, non-farm jobs consensus was +190K but increased 213K, and May non-farm jobs were increased to 244K from 223K. Private jobs consensus 182K were 202K and May jobs also revised to 239K from 218K. Manufacturing jobs expected +15K increased 36K. The labor participation rate after holding at 62.7% for the last three months increased to 62.9%; the number of unemployed actively looking for a job increased to 6.564 million from 6.065 million in May, lifted the unemployment rate 2 tenths to 4.0%. More jobs but fewer wage gains. Average hourly earnings were expected to have increased 0.3%, and +2.8% yr/yr; earnings up just 0.2% and yr/yr 2.7%. No inflation in wages are presently supporting better interest rate markets this morning.
At 9:30 am the DJIA opened -37 after trading +90 prior to the 8:30 employment data; NASDAQ +11, S&P unchanged. The 10-yr note yield 2.82% -1 bp from yesterday’s close.
The moderate rate of wage increase relieves the fear that inflation is increasing in a tight labor market, adding some minor support in rate markets in the immediate reaction to the less than expected wage growth. The latest read for the PCE, the Fed’s inflation gauge, increased 0.2% in May and yr/yr the core PCE +2.0%. He may be dancing on the edge, but Powell has made comments that he isn’t going to panic if inflation does increase over the target. The lack of inflation in wages this morning is supporting mortgage rates and prices. That said, the Fed will continue increasing rates at a gradual pace; one more is what we expect in September although the betting is about 50/50 for two more increases.
Tariffs on China have had little impact on global markets; this was widely expected and completely discounted prior to midnight. Next up, President Trump is threatening to impose tariffs on every single Chinese import into America as the world’s two largest economies exchange the first blows in a trade war that isn’t set to end anytime soon. According to the president, $16B more will be added, and the total could top $500B, more than the U.S. bought in 2017. China’s Commerce Ministry accused the U.S. of “bullying” and igniting “the largest trade war in economic history.” The trade war is on unless US and Chinese representatives can work out a plan, and that is highly unlikely in the near and intermediate term. A full-blown tit-for-tat trade war in which the U.S. slaps 10% tariffs on all other countries with their response in kind has economists reckoning U.S. growth would slow by 0.8% by 2020. Trump has already imposed duties on foreign steel and aluminum imports, drawing a response from the European Union and Canada that are worried he may go after automakers next.
The bellwether 10-yr still holds at 2.82%, down 1 bp from yesterday and at a rock hard resistance level. Same old same old; our technical models and momentum oscillators remain positive. If the 10-yr breaks below 2.80% we expect there will be a swift move lower to 2.77%. With inflation worries and the Fed increasing rates, the present thinking in markets is rates are not likely to move lower. There is an underlying argument being made that the trade war and the narrowing of the yield curve may be a precursor for a recession on the way. This doesn’t appear likely, but then again we have no history on trade fighting and economic impact. The current belief is that more tariffs will slow the US and global economies; if Trump continues to escalate more tariffs, there will be a slowdown and inflation as prices of goods increase.
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