- U.S. labor market expected to remain strong
- ISM non-manufacturing index expected to rebound higher
- Are U.S. and Chinese officials close enough to declare a final trade agreement next week?
U.S. labor market expected to remain strong — The markets are expecting today’s April unemployment report to show a relatively strong U.S. labor market, thus supporting the consensus view that the U.S. economy continues to chug along at a decent pace. The FOMC in its post-meeting statement on Wednesday said that the U.S. “labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.” Today’s unemployment report will show whether the Fed’s view is still valid.
The market consensus is for today’s April payroll report to show an increase of +190,000, close to March’s report of +196,000. Expectations for a solid report today were bolstered by Wednesday’s report that ADP jobs rose by a strong +275,000, recovering from March’s weak report of +129,000.
Today’s expected payroll report of +190,000 would be a bit weaker than the 12-month trend average of +211,000. However, payroll growth in 2019 is likely to be slower than last year as GDP growth decelerates to more normal levels after last year’s strong +2.9% pace on the massive 2018 tax cuts. Job growth is also likely to slow simply because U.S. businesses have hired a net new 21.1 million people since the Great Recession and many businesses are likely to be fully staffed.
The consensus is for today’s April unemployment rate to be unchanged at 3.8% for the third straight month, which would be just 0.1 point above the 49-year low of 3.7% posted in September 2018. Specifically, the Fed is expecting the unemployment rate to remain roughly where it is now for the next several years. The Fed is forecasting that the unemployment rate will dip slightly to 3.7% by year-end, but then rise slightly to 3.8% by the end of 2020 and 3.9% by the end of 2021. The current unemployment rate of 3.8% is below the Fed’s view of a long-term natural unemployment rate of 4.3%, which indicates a tight labor market with upward pressure on wages.
On the wage front, the consensus is for today’s Apr average hourly earnings report to edge higher to +3.3% y/y from +3.2% in March. Today’s expected wage report of +3.3% y/y would be just 0.1 point below the 10-year high of +3.4% posted in February, indicating continued upward pressure on wages as employers compete for employees in a tight labor market. Higher wages are positive for consumer confidence and spending but are negative for corporate profits.
ISM non-manufacturing index expected to rebound higher — The consensus is for today’s Apr ISM non-manufacturing index to show a +0.9 point rise to 57.0, recovering some of March’s sharp -3.6 point drop to 56.1. The markets will be on guard for a weaker-than-expected report today since Wednesday’s ISM manufacturing index report for April fell by -2.5 points to a 2-1/2 year low of 52.8.
Business sentiment in Q1 was hurt by weaker underlying economic growth, but received support from lower interest rates, the strong stock market, and hopes for a US/Chinese trade agreement.
Are U.S. and Chinese officials close enough to declare a final trade agreement next week? — The markets are looking ahead to next week’s US/Chinese trade talks in Washington when Chinese Vice Premier Liu will arrive with some 100 Chinese officials in tow. The fact that China is bringing 100 officials suggests that there may be a broader range of issues left to discuss than earlier thought and raises the question as to whether the U.S. and China are really as close to an agreement as advertised. Indeed, China’s Global Times on Thursday released an opinion piece questioning whether the US/Chinese trade talks might actually be at an impasse considering this week’s short Mnuchin/Lighthizer visit to China and the lack of detail from that visit.
Meanwhile, White House spokeswoman Sarah Sanders on Thursday said that Presidents Trump and Xi will decide after next week’s meetings whether they will meet. She said, “Certainly I think at that at the end of the day you’re gonna have to see the two leaders sit down and finalize some of the details of any major trade deal like this.”
Ms. Sanders again seemed to broach the idea that Presidents Trump and Xi could meet without a final agreement in place. That could be simply a ploy to make it look as though the two leaders heroically pushed a deal over the line when in fact a deal was already done. However, it could also mean that a absolute final deal by the end of next week isn’t likely and that some tough concessions remain that could only be made at the top.
China previously balked at the American attempt to get President Xi to come to Mar-a-Lago for last-minute talks for fear that Mr. Trump might make some onerous last-minute demands and end up walking away from the talks like he did from recent North Korean talks, thus making Mr. Xi look bad. For that reason it seems that China might only agree to a summit once a final deal has been reached. Thus it seems somewhat safe to say that if a Trump-Xi summit is announced next week, the markets can assume that a final agreement has actually been reached even if the two sides say that Trump-Xi must negotiate some final issues.
