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Non-Farm Payrolls

By David Morrison  |  01/02/2019 14:09

Here’s a look at the latest US jobs data. Earlier today we had confirmation that China’s manufacturing sector is in a technical recession, while the latest round of US-Chinese trade talks end without substantial agreement

Headline Non-Farm Payrolls rose by 304,000 in January, way better than the 165,000 expected. The gains came despite fears that job creation may have been negatively affected by the partial government shutdown. However, there were revisions made to both December’s and November’s numbers meaning an overall reduction of 70,000 jobs across the two months. Nevertheless, this was another blow-out number which led to initial rallies in US stock index futures and the dollar. The Unemployment Rate ticked up to 4.0% from 3.9% but remains near the lows for this century. Meanwhile, Average Hourly Earnings dropped back to +0.1% month-on-month from +0.4% in December.

Fed’s mandate

As far as the Federal Reserve is concerned, the data releases indicate that the central bank is fulfilling its dual mandate of maximising employment and ensuring price stability. Job creation remains strong, while a slight decline in wage growth suggests that inflation isn’t a problem. But jobs data is a lagging indicator and strong employment numbers tend to foreshadow a downward turn in the economy. So, while today’s data suggest US economic strength, and we’ve just heard that the Fed is now ‘patient’ when it comes to tightening monetary policy, it may be worth injecting a note of caution. After all, if everything was so rosy, why would the Fed not look to raise rates further? The current 2.5% fed funds rate is historically very low and hardly covers inflation. The fact is that global economic growth is slowing, and the Fed is worried. But for now, investors seem happy to load up on US equities.

Manufacturing recession in China

Overnight it was reported that China’s Caixin Manufacturing PMI fell to 48.3 in January from 49.7 in the previous month. This was its second successive sub-50 reading, indicating continued contraction in the sector. It also confirms a technical recession in Chinese Manufacturing as it follows on from the official Manufacturing PMI release on Thursday which came in at 49.5 for January, just a touch better than last month’s reading of 49.4.

More stimulus

Many analysts believe that the continued weakness in Chinese economic data will result in additional fiscal and monetary stimulus. Yet there’s no evidence that China’s major lenders (the beneficiaries of recent cuts to the Reserve Requirement Ratio) are lending more to smaller banks and corporations. The reason for their reticence appears to be a lack of confidence in the economy, particularly as hundreds of Chinese companies have just warned that they will be reporting losses in 2018.

US-China trade talks
Meanwhile in Washington, the latest round of US/China trade talks conclude today. Yesterday President Trump tweeted that: “Meetings are going well with good intent and spirit on both sides”. But he went on to write that: "No final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points." Chinese markets are closed next week for the New Year/ Spring Festival. This leaves only a short window of opportunity for the two leaders to meet and hammer out a deal. Trump has said that without a deal he will raise tariffs to 25% from 10% on $200 billion-worth of Chinese exports to US on 1st March. It’s apparent that there are still huge issues to overcome as far as the US negotiators are concerned. Earlier today US Trade Rep Robert Lighthizer said that talks had focused on key issues of China’s use of industrial subsidies and the forced transfer of technology from US companies. China, meanwhile, is sure to have brought up the US charges made against employees of tech giant Huawei – a particularly sensitive issue. However, Mr Lighthizer indicated that neither side was prepared to make any major commitments at this stage.

Trade resolution positive

China’s long-term aim is to overtake US in terms of global share of GDP and become the dominant world power technologically and militarily. The US knows this and is pushing back. The recovery in the US stock market over the past month has given Trump some much-needed breathing space to maintain a hard line with China and risk further market disruption. Bear in mind, in Trump’s view the proof that the US is winning the trade war with China is that US equities have held up better than Chinese ones. A resolution to this trade dispute would be very market-positive, although it won’t alter the fact that we’re still near the end of the 10-year bull run and inching closer to the recession which must come during every economic cycle. But the trade war has been running for a year now and considerable damage has already been done. That is particularly apparent if one considers the dismal data coming out of Germany where declining Industrial Production, Factory Orders, Manufacturing PMIs and Retail Sales are raising fears that Germany will soon join Italy in entering a technical recession.
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