The balancing act continued for market practitioners last week as relatively upbeat economic data trickled in (ISM manufacturing, factory orders, unemployment data all surprised on the upside) and as the largely anticipated trade war between China and the U.S. sparked as tariffs came into effect.
Nevertheless, by Friday, the market was hardly riled by trade fears when the jobs report took center stage. The unemployment data reflected more-than-expected jobs added in June. The S&P 500 ended the week higher at 2,760 on the back of the jobs data. Ten-year Treasury yields were trending lower at around 2.833%, given the slight uptick in the unemployment rate (due to increased labor participation) and as steady wage growth moderated inflation concerns allowing the Fed to potentially remain on a gradual pace of rate hikes.
U.S. economic data has been on an upswing of late with new jobless claims trending at historic lows, construction spending data surprising on the upside and ISM manufacturing continuing its expansion, despite tariff tensions. Earlier in July, the Federal Reserve Bank of Atlanta revised its second-quarter GDP higher to about 4.1%. While the slight rise in the unemployment rate allows the Federal Reserve a little bit of wiggle room if the economy continues to gain steam and if wage pressures increase, it will likely fuel the pace at which the Fed raises rates.
Two factors that may keep the Fed cautious going forward include: 1) any unknown risks associated with an escalating trade war and 2) the U.S. economic growth story, which has been driven by the Trump Administration’s fiscal stimulus plans and has been financed by ballooning government debt.
I. U.S. Economic Data
- June Unemployment data surprised to the upside, as 213k jobs were added last month as opposed to the market’s expectation of 200k.
- The unemployment rate increased slightly from 3.8% to 4%, which was due to 601,000 more people joining the workforce.
- An increase in average hourly earnings of about 0.2% or 5 cents, coming in lower-than-expected. The average hourly earnings have increased 2.7% over the course of the year.
- 36,000 jobs created within the manufacturing sector were a key driver behind the gains.
- Upward revisions to the April (+16,000) and May (+21,000) payrolls.
- Total job gains have now averaged 211,000 per month over the past quarter.
II. China/U.S. Implement Tariffs: Both countries implemented tariffs on nearly $34 billion of each other’s exports, which took effect midnight on Friday (EST). While the initial impact of the levies will be relatively minor, according to economists, concerns linger if the tariffs continue to escalate.
- China’s industrial sector would be largely hit by the U.S. tariffs and conversely the U.S. agricultural sector.
- The Trump Administration is considering levies on an additional $16 billion of goods that may take in effect later this month. Trump also noted that additional tariffs may come into play aggregating to more than $500 billion.
III. Other
- Canada also added more jobs than the market expected in June, but with more people joining the workforce the unemployment rate rose from 5.8% to 6%. Wages also increased by nearly 3.5% relative to a year ago. The positive data further drives the likelihood of the BoC hiking rates at its meeting this week.
- Mexico elected a new president, Lopez Obrador, the first leftist candidate to win in decades. Obrador has noted the importance of NAFTA and his willingness to work with the Trump Administration regarding trade relations. However, Obrador’s presidency could prompt greater scrutiny of foreign investment and a less accommodating approach to the United States. Obrador officially takes office in December. The Mexican peso rallied on the back of Obrador’s win. The market will pay close attention if Obrador’s party wins the majority in Congress, thereby increasing the chances of getting his economic policies passed.
- Britain’s Prime Minister, Theresa May, gathered her cabinet to discuss Britain’s post-Brexit relationship with the EU. The takeaways below reflect the UK government’s preferred way of dealing with Brexit negotiations going forward:
- The UK will maintain a common rulebook for all goods with the EU. British parliament will have the ability to oversee the trade policy and diverge from the agreement.
- The borders between the UK and EU will be treated as combined customs territory, allowing the UK to charge tariffs as it deems fit and allowing it to have an independent trade policy.
- The UK will regain control regarding how people may enter the country.
- Further, Brexit Secretary, David Davis, who was leading the negotiations on behalf of the UK with the EU, resigned over the weekend. Davis was quoted that he felt that the UK was giving away too much and too easily to the EU. His chief of staff, Dominic Raab, will now serve as secretary.
This week:
A number of key economic data releases and events are scheduled throughout the week. Domestically, all eyes will be focused on June inflation data released on Thursday. A stronger reading will fuel a selloff in the market as it gives the Federal Reserve further reason to hike at a faster pace. Key data includes:
CNY PPI/CPI (Tuesday)
GBP GDP (Tuesday)
Bank of Canada Rate decision (Wednesday)
AUD consumer inflation expectations (Thursday)
German Harmonized index of consumer prices (Thursday)
U.S. June CPI (Thursday)
CNY trade data (Friday)
U.S. economic data includes:
May consumer credit change (Monday), NFIB business optimism index (Tuesday), redbook index, JOLTS jobs opening, MBA mortgage applications (Wednesday), PPI, wholesale inventories, weekly jobless claims (Thursday), June CPI, EIA Natural Gas Storage change, trade data (Friday), Michigan consumer sentiment index, Baker Hughes US Oil Rig Count.
Overseas Economic Data includes: Swiss unemployment rate (Monday), German trade data, NZD electronic card retail sales, GBP BRC like-for-like retail sales, AUD national confidence (Tuesday), CNY PPI/CPI data, GBP manufacturing and industrial production, GBP trade balance, GBP GDP, German ZEW economic sentiment and current situation surveys, EUR economic sentiment survey, CAD housing starts/building permits, JPY machinery orders, AUD home loans (Wednesday), AUD Westpac consumer confidence, EUR non-monetary policy ECB meeting, BoC rate decision/press conference/monetary report, JPY foreign bond investment, JPY foreign investment in Japanese stocks, AUD consumer inflation expectation (Thursday), German Harmonized index of consumer prices, French CPI, BoE credit survey, EUR IP, ECB monetary policy meeting accounts, CAD new housing price index, NZ business PMI, CNY trade data (Friday), JPY IP, Spanish CPI.
