May 2 – Today’s focus is on jobs, and what the monthly jobs report tells us about the state of the economy in the middle of this trade war. Stock futures are currently reacting to the numbers that came out this morning, trading higher after already posting solid gains overnight. The VIX is trading below 23, while the dollar index is trading near 99.9. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 3.78%. Crude oil prices are modestly lower, near $59 per barrel, while the grain and oilseed markets were mostly firmer overnight.
The U.S. economy created 177K non-farm jobs in April, beating analyst expectations of 130K, although the March numbers was revised to 185K, down from the 228K originally reported. Private payrolls grew by 167K in April, up from expectations of 125K, although the March number was revised to 170K, down from 209K originally. Manufacturing lost 1K jobs, which was actually a bit better than the 3K that it was expected to lose. Healthcare added 51K jobs in April, while transportation and warehousing added 29K, financial activities employment added 14K, social assistance added 8K, while government employment declined by 9K jobs. This reverses a trend that has been in place in recent years in which roughly half the jobs created each month tended to come either directly from government openings or government-related contract jobs. In other words, growth of our economy was becoming dependent on continued growth in government. We’re seeing the early signs of a reversal of this trend, although we still have a way to go to turn that ship around.
It should be noted though that February and March job creation combined was revised lower by a combined 58K. Nonetheless, today’s jobs report allows the markets to give a bit of a sigh of relief, as the surveys that made up this report were conducted during the week in which uncertainty was the highest following the announcement of President Trump’s reciprocal tariffs. This doesn’t say that things can’t get worse, but it does suggest that perhaps the economy wasn’t responding to the tariff war as negatively as the headlines would suggest, while also reflecting some of the resiliency of the economy to this point. The unemployment rate remained unchanged at 4.2% in April, which is a very low number from an historical perspective. In fact, the labor force participation rate actually ticked higher to 62.6% in April, reflecting an increase in people joining the workforce. Average hourly earnings rose by 0.2% on the month, down from analyst expectations that wage inflation would remain at 0.3%. Average hourly earnings are up 3.8% year-on-year, unchanged from March, but below expectations that they would rise by 3.9%. As such, wage inflation appears to be stable to softer. The average workweek was 34.3 hours, up from expectations of 34.2 hours, suggesting that employers are utilizing their workforce. Overall, this is a good report, considering the context in which it was given – that being of the tariff war that was unfolding in April. This sustained the strength in the stock market this morning, where the Nasdaq traded to its highest level since March 27 yesterday, which was prior to the start of the reciprocal tariffs. The Dow and the S&P are close behind.
A spokesperson for China’s Commerce Ministry indicates that China is considering U.S. requests to begin negotiations over trade. One thing that China did not want to project was an image that it was begging for negotiations. President Xi Jinping enjoys tremendous popularity within China currently for being the one world leader willing to stand up to the “bullying” of America. Keep in mind that the message is tightly controlled within China, and the people there have been told that America has been implementing unfair trade practices for years, and that it has now declared war on China, with Xi the only world leader with the courage to stand up to the bully. Pleading for negotiations would weaken that image and tarnish the popularity that he has. President Trump closed a loophole that allowed some products to avoid tariffs by being purchased online, while also tightening sanctions on any country that buys Iranian oil. China buys the bulk of that Iranian oil, financing Iran’s military activities in the Middle East. Those factors further tighten the screws on China’s hurting economy. Then he gave Xi a way out by communicating to him that he could say that “America is asking for negotiations.”
That’s the open door that I’ve been saying that China needed. I still believe that we are far from a deal with China. Xi Jinping still believes that he has the edge here – that voters will turn on Trump before he loses the support of his followers, where he controls the message. But the tariff war has already shut down factories in China and caused its debt to balloon as it tries to prop up its economy. As such, this opens the door for things to start moving in the right direction. It took 13 face-to-face negotiations to get the Phase One deal during Trump 1.0, and the issues are far more complex this time around. President Trump’s focus will be on completing other trade agreements with major trading partners that would allow him to maintain momentum in maximizing pressure on China.
