US March 2018 Labour report: "Mixed report requires perspective, but likely to be roadkill amid trade stand-off"
a) Payrolls / Establishment survey - This is a classic 'perspective is everything' payrolls report, the much weaker than expected 103K for March is in essence payback for the upwardly revised 326K in February, and leaves the Q1 average monthly increase at a very solid 202K, i.e. still far above the Fed's assumed 80-100K breakeven rate. The weakness in March was broad based, suggesting that the seasonal adjustment for both February & March needs revisiting. Unsurprisingly there was payback for February strength above all in Retail (-4.4K vs. Feb +47.3K) and Construction (-15K vs. Feb +65K), and some sluggishness in Leisure / Hospitality (+5K vs. Feb +23K) and Temporary Help (-0.6K vs. Feb +21K); Manufacturing continued to add jobs at a slightly above average pace of +22K (Feb +32K).
b) Unemployment Rate / Household Report - The Unemployment Rate was unchanged at its cyclical low of 4.1% (vs. forecast 4.0%), with marginal drops in Employment, Unemployment & Workforce. Encouragingly the U6 Underemployment Rate dropped back to its cyclical low of 8.0% (from 8.2%), though this was partially offset by a dip in the participation rate to 62.9% from 63.0%. Overall rather unremarkable.
c) Average Hourly Earnings / Weekly Hours - Average Hourly Earnings were bang in line with forecasts at 0.3% m/m 2.7% y/y (Feb 2.6% y/y), trending glacially in the right direction, and per se giving the Fed plenty of room for manoeuvre. Average Weekly Hours were also bang in line with forecasts at 34.5 (+0.1% m/m), with Manufacturing Hours dipping to 40.5 from 40.6, but very much in line with the Q4 average. Continued strength in Mining at 46.0 from 46.1, and is way above the Q4 average of 45.5, and points to ongoing strength in the Energy sector, which offset a dip in Construction (39.2 vs 39.4). Overall these items point to a solid pace of expansion.
d) Market reaction - Best described as a brief shrug of the shoulders, with the focus returning instantly to US/China trade tensions (see also BNN interview link below), with the key 'take home' from the China Commerce Ministry press conference being the statement that 'under these conditions (i.e. the threat of an additional $100 Bln of tariffs) the two sides cannot conduct any negotiations'.
A key problematic for China is that US exports to China are around $105-110 Bln, by extension not enough for a tit-for-tat retaliation, though obviously the Chinese authorities could make it a lot more difficult for US companies to operate in China (autos would appear to be an easy target). As an aside, it should be observed that trade tariffs are not per se a huge problem, but rather the big disruption to supply chains that would ensue, if they are implemented. These would be costly just in terms of the ‘beauty parades’ to find new suppliers (with quality issues a further hurdle), as well as pushing prices higher due to less competition & tariffs. Watch for butterfly effects (i.e. the chaos theory proposition that sensitive dependence on initial conditions in which a small change in one state of a deterministic nonlinear system can result in large differences in a later state), i.e. “a straw that breaks the camel’s back”. It remains to be seen who might take the first step to dial back on threats, and dial up on negotiations, as well as which other countries may be dragged into this minefield.
- Charts: USD TWI, US 2/10yr yield spread, US 10-yr yield, S&P500 future and Fed rate probabilities by meeting.
Some further thoughts via BNN earlier on the US/China trade spat:
https://www.bnn.ca/video/china-u-s-trade-spat-a-game-of-chicken-strategist~1364763
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Marc Ostwald
Global Strategist
ADM Investor Services International
