U.S. unemployment report expected to reassert U.S. labor market strength
Markets await outcome of U.S.-Chinese trade talks on Thursday/Friday
Italy’s president plans a last-ditch effort on Monday for coalition negotiations
U.S. unemployment report expected to reassert U.S. labor market strength — Today’s April unemployment report is expected to be strong enough to show that the weak March payroll report was a fluke and that the U.S. labor market remains strong. A strong unemployment report today, combined with the recent strength in U.S. inflation measures, would keep the Fed on track with its steady rate-hike regime.
The consensus is for today’s April payroll report to show a solid increase of +191,000, which would be just above the 12-month trend average of +188,000. Today’s payroll report is expected to rebound higher from March’s weak report of +103,000, which was mostly due to temporary factors such as weather and payback from Feb’s strong report of +326,000. However, if today’s payroll report is weaker than expected, then talk will emerge about whether businesses may be cutting back on hiring due to uncertainty about trade tensions and rising interest rates.
Wednesday’s April ADP report of +204,000 was slightly above the consensus of +198,000 and supported expectations for a solid payroll report today. The ADP report has been stronger than the payroll report in recent months since the ADP report in the past 6 months has shown an average monthly increase of +227,000 versus the smaller +211,000 increase in payrolls.
Meanwhile, the consensus is for today’s April unemployment rate to fall by -0.1 point to a new 17-year low of 4.0% from the 6-month streak at 4.1%. Today’s expected unemployment rate of 4.0% would be just above the Fed’s forecast of 3.8% by year-end and 3.6% during 2019-2020. However, the expected unemployment rate of 4.0% would be well below the Fed’s estimate of a long-term natural unemployment rate of 4.5%, indicating that the FOMC currently views the U.S. labor market as being tight.
The markets continue to watch to see if the tight labor market will put an upward squeeze on wages. The consensus is for today’s Apr average hourly earnings report to be unchanged from March’s +2.7% y/y report, which would be only -0.1 point below January’s 8-3/4 year high of +2.8%. If wage growth happens to break out above +3.0% in coming months, then a fourth rate hike for the Fed by the end of this year will become much more likely. At present, the market is discounting only about a 50% chance of that fourth rate hike in December.
Markets await outcome of U.S.-Chinese trade talks on Thursday/Friday — The markets are waiting to see if U.S. and Chinese officials make any progress in trade talks on Thursday/Friday in Beijing. There was no real news from Thursday’s session, with one Trump official saying only that the talks were “fairly positive.” The good news was that the U.S. delegation at least turned over a “detailed list of asks,” according to VP Pence’s chief economist Mark Calabria. Chinese officials have been hamstrung in trying to respond to the Trump administration’s trade demands because they haven’t had a clear sense of what exact concessions the Trump administration would want for a deal.
Market expectations for this week’s meeting are low but both sides can be expected to put the best face on things in order to prevent a global stock market rout. There could at least be an agreement to hold formal negotiations and delay the reciprocal 25% tariffs on $50 billion of goods that both sides have promised. The U.S. tariffs are currently in the 60-day comment period, after which time the U.S. Trade Representative can implement whatever tariffs the administration decides upon. In some good news on Thursday, the U.S. trade deficit with China fell to a 1-year low of $25.9 billion in March from Feb’s $29.3 billion.
Italy’s president plans a last-ditch effort on Monday for coalition negotiations — Italian President Mattarella on Monday will hold a 1-day round of talks with the major parties in a last-ditch attempt to see if there is any possibility for a coalition government. The parties have already tried all the permutations without success. If there is no chance for a breakthrough, then new elections will have to be called. However, President Mattarella has indicated that his preference would be to appoint a transition government whose main job would be to pass a budget and a new electoral law.
A new electoral law would presumably roll back the law implemented before the last election that favored the formation of coalitions prior to elections. The law is arguably an obstacle to a new government in the current situation since the League has refused to agree to Five Star’s demand that it ditch its center-right coalition partner, Berlusconi’s Italia Forza. If a new coalition law breaks up that center-right coalition, that could make it easier after a new election for Five Star and the League to form a government, depending on the voting results, of course. The market would not be pleased with a populist Five Star-League government that does not have any grounding from the establishment Forza Italia party.
If a vote were to be held under the current electoral law, there is nothing to indicate that the outcome would be any different than the current impasse. It remains to be seen, however, whether the parties in a transition government would even agree to electoral reform.
The markets continue to show remarkable patience with the Italian political logjam. The spread of the Italian 10-year bond yield over German bunds is currently at 120.8 bp, which is only +7.2 bp above the recent 1-3/4 year low of 113.6 bp. The markets may be less tolerant if Italy has go through the grinding process of passing a new electoral reform bill and then holding another election later this year.