The Market Today
More Jobs and More Tariffs
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Update – Thursday April 5, 10:00 a.m. CT: Vining Sparks will host its 2nd Quarter Economic Outlook Update during which we will discuss the significant increase in market volatility this year. We will discuss why the increased volatility is a symptom of a larger underlying challenge to economic stability. To register, click here.
ADP Reports Another Month of Unsustainably Strong Job Growth: The pace of job growth continues to exceed expectations, and in a meaningful way according to the March ADP payroll report. The report projects 241k private payrolls created for the month, 59k above the trailing 12M average and 31k above expectations. While there are some methodological differences in the ADP and BLS calculations which cause the ADP report to miss some weather disruptions more than BLS’s report, this morning’s data points to another very strong month for the labor data (released Friday). By sector, construction, manufacturing, and trade/transport/utilities saw the strongest outperformance. After averaging 276k new payrolls per month in the first two months of the year, payrolls are expected to grow 190k in Friday’s BLS report. At the current run rate, job gains are materially outpacing labor force growth increasing the risks to the economy overheating. This continues to be evident in the record-high rate of job openings and surveys showing businesses struggling to hire qualified labor.
At 9:00 a.m. CT, the ISM Non-Manufacturing Index is expected to remain very strong but pull back fractionally.
Yesterday – Treasury Yields Rose as the S&P 500 Rebounded Above its 200-Day Moving Average: U.S. equities rebounded Tuesday, partially erasing Monday’s drop and relieving the downward pressure placed on the Treasury curve. The day’s trading wasn’t one-directional, and while the Dow held in positive territory for the entire session, the S&P and Nasdaq moved in and out of negative territory several times as tech shares remained volatile. Amazon, which has had a rough several sessions as a result of tweets from the President, rallied late on a report citing knowledgeable sources saying there were no ongoing talks at the White House about taking on the company. The jump pushed the major indexes to their highs of the day and another greater-than-1% daily result. The S&P 500’s gain lifted it back above its 200-day moving average and out of technical no man’s land. Treasury yields climbed steadily throughout the day with the 2-year yield finishing up 3.2 bps and the 5-year and 10-year notes closing just under 5 bps higher.
Overnight – Tariff Details Take the Steam Out of Yesterday’s U.S. Equity Rebound: Trade tensions, which have been simmering for more than a month now, boiled hotter overnight causing equities to weaken and sovereign debts to catch a bid. On March 22, the White House proposed tariffs on up to $60B of Chinese imports, eliciting a quick response from China that they would not hesitate to retaliate. Those broad-brushed warnings have become more detailed within the last 24 hours. Late Tuesday afternoon the White House released a list of 1,300 product categories valued at roughly $50B – including among other things dishwashers, medicines, and machine tools – that could be tagged with a 25% tariff. Overnight, China responded with a list of $50B of U.S. goods – items such as soybeans, autos, cotton, and beef – that it could place a 25% tariff on if provoked. While nothing became effective immediately – the U.S. proposal is open for industry comment until May 22 and Beijing didn’t provide a timeline – it was enough to stain the market sentiment. U.S. futures are pointing to a sharp opening drop and the Treasury curve has fallen by 2 to 3 bps across the curve. Lost in the tariff tensions were several weaker global PMIs and a core inflation miss for the Eurozone that coincided with a dip in the unemployment rate to another new cycle-low.
NY Fed Finds a Familiar Face to Replace Outgoing President Dudley: The New York Fed announced that current San Francisco Fed President John Williams will take the reins of the most powerful district reserve bank when current President William Dudley steps away in mid-June. Williams will be vacating a position he assumed when Janet Yellen left California for Washington to join the Federal Reserve’s Board of Governors in 2011. As head of the New York Reserve Bank, Williams will assume a more prominent role in monetary policy decisions and have a permanent vote on the FOMC. Williams has done meaningful research around a lower neutral rate and has recently challenged the Fed to research alternate policy frameworks such as price level targeting for potential use in the future. However, his recent public remarks show he currently supports three to four rate hikes this year.
Brainard Believes Asset Prices Remain Elevated: Fed Governor Brainard said she believes overall financial risks are currently moderate but that prices across asset classes remain elevated. Brainard said, “Estimates of risk premiums and spreads in a range of markets remain narrow by historical standards,” adding that “asset prices might be particularly susceptible to an unexpected development that accentuates downside risks to the macroeconomic outlook,” (see the recent market volatility surrounding concerns about inflation and trade). In the Q&A portion of her appearance, she said stronger growth tailwinds could help re-anchor inflation expectations and referred to recent developments on trade policy as a material uncertainty.