Market and Economic Update: US creates 263,000 jobs in April - Raiz Invest

07/05/2019

From Raiz Ceo, George Lucas 

 

US creates 263,000 jobs in April

Last week saw the release of the latest US employment report, published on Friday. The report was strong, with non-farm payrolls increasing by 263,000 in April, above consensus expectations, while the unemployment rate fell to its lowest level in nearly 50 years.

However, wage inflation was a bit weaker than expected, hours worked edged down, and the unemployment rate only decreased owing to a massive fall in the labour force. That’s probably why yields on Treasury bonds dropped and stock market rallied.

Even so, the report still suggests that the underlying fundamentals of the US economy remain solid. Confirming the data, first-quarter gross domestic product expanded by 3.2 per cent, the US Bureau of Economic Analysis said in its initial read of the economy for Q1.

 

US Federal Reserve hold interest rates steady

Still in the US, although there was no policy change after the latest Federal Open Market Committee (FOMC) meeting, investors appear to have been caught off guard initially by the reduction in the interest on excess reserves (IOER) rate and subsequently – and more importantly – by Fed Chair Jerome Powell downplaying recent weakness in inflation.

The Fed might be reluctant to cut rates just because of the recent weakness in inflation, particularly given that labour costs could pick up. This is a similar issue that the RBA is facing here in Australia, which will be heightened if Labor wins at the upcoming federal election.

 

China’s economy loses more momentum

In Asia, China’s onshore stock markets brushed off the pull-back in the country’s PMIs released last week, but the data ultimately supports a view of a slowing Chinese economy.

Chinese equities have surged by more than 30 per cent between the turn of the year and mid-April, driven in part by optimism about earnings. According to Bloomberg, analysts anticipate a 25 per cent jump in corporate earnings in the Shanghai market in the next twelve months, which would require a very strong rebound in the economy.

However, this is not supported by the recent PMI data and the Shanghai and Shenzhen markets have actually started to falter since 19 April. They are down by 6 per cent and 8 per cent, respectively, from their peaks, despite ticking up last Tuesday.

What is also surprising is the lack of reaction to those drops elsewhere. The S&P 500 has risen to a record high, and European and Japanese indices have edged up.

China is large enough that equities there rarely head in the opposite direction to those elsewhere for long. Foreign investors may initially ignore falls in China as signs of a “healthy” correction in a overbought market, but will probably eventually react.

 

US-China trade talks set to resume

Looking ahead, trade negotiations with China are due to resume in Washington this week, with a deal said to be close. According to reports, key points that remain at issue include how to police any deal, and whether existing tariffs will be removed or stay in place.  However, a war of words between the US President and China have thrown some doubt over whether this meeting will now take place.

This next round to negotiations follows talks last month in Beijing that US Treasury Secretary Steven Mnuchin labelled “productive”.

 

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