A lackluster jobs report can’t wrest the spotlight from trade concerns
Brian Nick, Chief Investment Strategist, TIAA Investments
The past week’s market highlights:
Quote of the week:
“April is the cruellest month, breeding Lilacs out of the dead land, mixing Memory and desire, stirring dull roots with spring rain.” – T.S. Eliot, “The Waste Land”
As part of our new format, we are presenting our featured weekly topics in the context of the major themes listed below from the Nuveen Q2 Outlook:
U.S. economy: Late cycle has arrived.
Global economy: There’s still good news out there.
Policy watch: In an unusual twist, U.S. fiscal and monetary policies are diverging.
Fixed income: Bond markets offer few places to run, even fewer places to hide.
Equities: The bull market’s not over, but expect plenty more volatility.
Asset allocation: Valuations are no longer at extremes.
U.S. economy: The U.S. jobs engine cools in March after a red-hot February
The U.S. economy added only 103,000 jobs in March, well below forecasts. In addition, employment gains for January (176,000) and February (326,000) were revised down by a combined 50,000, trimming the first-quarter monthly average to 201,000—still a more-than-respectable number. The unemployment rate remained at a 17-year low of 4.1% for a sixth consecutive month. Meanwhile, the labor-force participation rate edged down from 63% in February (tied for its highest level since 2009) to 62.9% last month. But in a sign that the labor market is still tightening, average hourly wages climbed 0.3% in March, lifting their year-over-year rise to 2.7% from February’s 2.6% pace.
We aren’t overly concerned by the low headline payrolls figure. First, these reports are notoriously volatile on a month-to-month basis, as they’re prone to seasonal vagaries such as inclement weather. Second, we view March’s showing as a partial “giveback” of February’s outsized gain. Third, the number of people receiving benefits after an initial week of unemployment aid (so-called “continuing claims”) fell to 1.81 million for the week ended March 24, the lowest level since December 1973. This data points to a still-robust economy and job market.
For its part, the Fed is unlikely to stop raising interest rates in June as a result of March’s lackluster employment data. Therefore, we continue to expect three more hikes this year (for a total of four). The potentially negative impact of U.S. tariffs, however, could be a longer-term consideration for the Fed in calibrating the pace of future rate increases.
Hopes for a de-escalation of the U.S./China trade skirmish were diminished during the week. On April 5, the White House proposed a 25% tariff on an additional $100 billion of imports from China, adding to fears of a tit-for-tat conflict with the world’s second-largest economy. An all-out trade war could dramatically reduce U.S. and global growth prospects and further dampen market sentiment.
Late in the week, fixed-income markets focused more on the Trump administration’s latest salvo and less on the jobs report. The yield on the bellwether 10-year note, which began the week at 2.74%, rose to 2.83% on April 5 as equity markets rallied. A “flight to safety” on April 6, though, sent the 10-year yield down to 2.78%.
Global economy: Emerging-market equities weather trade-war concerns
After a volatile first quarter, some investors may wonder if slowing momentum in some developed market (DM) economies and escalating global trade tensions will disproportionately hurt emerging-market (EM) equities.
Concern about these near-term issues is understandable. As we noted heading into 2018, however, longer-term EM fundamentals are solid. Moreover, we remain bullish on select EM equities, particularly as valuations trade at a discount to their DM counterparts.
The threat of a looming trade war, with the U.S. and China at its epicenter, has been a particular source of anxiety for equity markets. A conflict of this type would likely have the greatest impact on emerging Asia, which has the largest trade imbalances with the U.S. Yet despite the recent harsh rhetoric and retaliatory threats, we believe U.S. and Chinese policymakers will ultimately seek to avoid a full-scale trade war and continue to negotiate.
Of potentially greater significance is China’s focus on its domestic economy. While the pace of growth is moderating overall, some sectors—such as technology and gaming—remain strong. Beyond China, we have seen steady upgrades in EM growth forecasts since mid-2017. The International Monetary Fund projects that GDP growth in the EM sphere will outpace DM growth by as much as 3 to 1 through 2022. Firming economies, combined with lower overall inflation and healthy balance sheets, have provided EM central banks with the flexibility to reduce interest rates without stoking a currency crisis.
As for EM equity market opportunities, we see potential in countries experiencing cyclical recoveries, as well as those that are more insulated from the trade crosshairs. Also of interest are countries where market-friendly reforms or democratic regime change, such as we are seeing in Argentina, can contribute to long-term EM growth. South Africa is another EM where a new government has been elected to weed out corruption and revive the economy.
Elsewhere, Brazil continues to recover from its 2015-16 recession, with improved consumption, strong labor markets, and dampened political turmoil. Economic improvements and reasonable valuations have made Russian equities attractive as well.
