- Tariff Traumas vs. the Economic Engine.
- Job growth was a bit soft in March relative to expectations, but wages grew faster.
- Tariff talk intensifies. Will we have a trade war?
- Q1 earnings season arrives at last. Will it live up to expectations?
Tariff Traumas vs. the Economic Engine.
The dual threats of higher interest rates and a trade war with China weighed down markets in the latest week. The key March employment report was not as strong as the market expected but did not alter perceptions that the economic engine is running smoothly. Rising wage growth suggested the Federal Reserve would continue to raise interest rates as planned, despite the current market volatility. The S&P 500 fell -1.35% but did manage to stay above the technically important 200-day moving average. The index closed -9.3% below the January 26 high. The trade-sensitive technology and industrials sectors led the broad-based decline. Small-cap and emerging market stocks declined less than the S&P 500, while developed international equities rose slightly.
Despite the heightened anxiety, bond yields rose slightly causing a modest decline in the Bloomberg/Barclays U.S. Aggregate bond index, a composite of investment grade bonds. The yield on the 10-year Treasury moved up to 2.78% from 2.75% the previous week. In other markets, real estate and oil declined, while gold prices rose 0.66%. The value of the dollar was largely unchanged.
Job growth was a bit soft in March relative to expectations, but wages grew faster.
We at Via Nova believe the jobs report (Employment Situation is the official title) is the single most important economic gauge released each month. It comes out early in the month, measures how many people work in various industries, how long they work and how much they are paid. It also provides a variety of metrics examining various aspects of unemployment; who, how long, age, race, etc. From this single report, analysts are often able to get a close approximation of other key economic reports due later in the month including industrial production and personal income.
The March employment report was satisfactory, though not robust. Employment increased 103,000, which was below the 175,000 consensus forecast. The softer print was not surprising given the string of winter storms hampering activity during the month, as well as the exceptionally large 326,000 surge in February. Strong monthly reports are often followed by more moderate gains. For the first quarter, job gains averaged 202K and 188K over the past year. Wages increased a better than expected 0.3% in the month to 2.7% over the past year. More people working with higher wages suggests additional momentum in personal income, confidence and spending.
Tariff talk intensifies. Will we have a trade war?
President Donald Trump made good on his campaign rhetoric to reduce the large international trade deficit by proposing tariffs on Chinese imports. China, as expected, immediately responded with tariffs of its own on U.S. goods targeting politically sensitive states. Early efforts by Administration officials to calm the financial markets appeared reasonably successful, and markets moved higher. However, Thursday night, the President announced that he had instructed officials to draw up a list of tariffs totaling another $100 billion in response to China’s move. China’s Commerce Ministry spokesman, Gao Feng, said “If the United States announces an additional $100 billion list of tariffs, China has already fully prepared, and will not hesitate to immediately make a fierce counter strike.” Mr. Trump defended his action, “I’m not saying there’s not going to be any pain,” but “we’re going to be stronger for it.” Markets dropped on the quotes pushing the major indexes into negative territory for the week.
Most commentators agree a trade war would be negative for all concerned, but there is disagreement on the relative bargaining position and strength of the U.S. with China. Via Nova’s most likely or baseline scenario assumes that a trade war can be avoided, though risks have clearly increased in recent weeks.
Coming Week: Q1 earnings season arrives at last. Will it live up to expectations?
The markets have had relatively scarce earnings news during the past several weeks, leaving more than ample time to opine on the risks and probabilities of a trade war with China. But now we enter first quarter earnings season, and investors will get a first glimpse of how a growing economy and tax cuts affect profits growth. Expectations are for a strong reporting season. After-tax S&P 500 earnings per share (EPS) are projected to rise 17.1% from the first quarter of 2017, according to FactSet. If realized (and actual earnings usually surpass expectations), it would be the largest increase since Q1 2011.
EPS estimates rose throughout the quarter, in contrast to the usual downward guidance from firms. Fewer companies issued negative guidance compared with the average over the past five years, while more firms gave positive guidance. Tech sector companies issued the greatest number of positive EPS announcements. Lower effective tax rates are frequently cited by companies as a key reason for the improved earnings guidance. Via Nova believes that managements will be cautiously positive on the effects of the new tax law, which could allow for a steady stream of positive earnings surprises throughout 2018.
Seven S&P 500 companies (including 1 Dow 30 component) are scheduled to report in the coming week. Citigroup and JPMorgan Chase release earnings Friday before the opening bell.
The Consumer Price Index is perhaps the major piece of economic news due in the coming week, and the market is expecting a modest 0.1% rise for March following the 0.2% increase in February.
Also, Facebook CEO Mark Zuckerberg testifies before Congress on Tuesday to a joint hearing before the Senate Judiciary and Commerce Committees. Zuckerberg is expected to be on the defensive, and Congress is likely to entertain new regulations promoting better disclosure and enhanced consumer privacy. Translation… higher operating expenses for Facebook.