Economic Juggernaut vs. the Trade War
July 6, 2018
The $34 billion in tariffs on Chinese imports become official last night, and I was pleasantly surprised to see that the market handled that knowledge very well heading into the close yesterday. I suspect a part of the reason was an overture from the Chancellor of Germany with respect to possibly reducing European Union tariffs on American car exports to the continent.
Chinese trade proxies were generally higher, although soybean prices are now down more than 18% in the last three months.
- Semiconductors: +2.7%
- Boeing (BA): +0.8%
- Caterpillar (CAT): +1.5%
- Apple (AAPL): +1.5%
- Soybeans: +1.1%
Technology led the way powered by a rebound in chip makers, but value hunters are still looking at consumer staples. Market breadth was the best in a long time as there were overwhelmingly more advancers on good volume than decliners.
As big as the trade news is, even bigger was this morning’s monthly employment report from the federal government that is considered the most important monthly report card on the U.S. economy. Nonfarm payrolls beat Wall Street’s expectations and rose 213,000 in June. Economists had forecasted 195,000. Job additions in May were revised higher from 223,000 to 244,000, and the April figures were also boosted from 159,000 to 175,000.
The participation rate increased 0.2% to 62.9% as 601,000 people poured into the labor force. While this negatively skews the headline unemployment rate, it is great news overall and one of the best ways to survey American optimism.
Average hourly earnings increased 2.7% year-over-year versus expectations of a 2.8% increase. However, the unemployment rate crept higher from 3.8% to 4% due to those folks trying to get back into the workforce.
Here are some of the key takeaways:
- Net Jobs: +213,000
- Goods Producing Jobs: +53,000
- Manufacturing: +36,000
- Construction: +13,000
- Mining: +4,000
For me, one of the most important trend remains what’s happening in goods-producing jobs – or as I call them, “dirty fingernail jobs.” In the 18 months that President Trump has been in office, goods-producing jobs have increased at an average of 40,700. A year and a half ago, the average was just 10,700.
The market initially reacted well to the news but opened mixed, which is par for the course right now. Just remember, this is the calm before the big move, and it should be to the upside based on economic fundamentals. We’re already making money on those fundamentals, and the good news is that I expect that to continue, even with the headline-driven ups and downs.