Speak Softly and Carry A Big Rain Check
Strong gains in U.S. equities this morning were based on two factors. First, the ADP National Employment Report tallied a 195,000 jobs gain, up from 142,000 last month and beating forecasts. Not gaudy 2018 numbers, but a strong reading nonetheless. Second, China’s Commerce Ministry confirmed that it had agreed to further trade talks with U.S. Trade Rep. Robert Lighthizer and Treasury Sec. Steve Mnuchin in October.
The first factor has merit. The second amounts to kicking the can down the road, since the previous agreement was to hold further talks this month, not next. Nevertheless, investors soaked up rhetoric from the Chinese ministry such as, “Both sides agreed they should work together and take practical actions to create favorable conditions” for the talks. It’s nicely phrased nonsense. That and $5 will buy you a cup of coffee.
The facts are that both sides seem content to delay until the outcome of the U.S. presidential election comes into greater focus. Nice words and kind trade deal overtures have become kindling for the global market fire when it is increasingly and inevitably dampened by recession signals. When the world’s two largest economies are at war, there are real repercussions. Holding out the promise of peace to falsely juice markets is a long-term loser.
Promises to make progress are just that–promises–and are only as good as the word of the one doing the promising. In the case of China, chicanery is the rule, not the exception. Don’t expect any big deal in October. In fact, don’t expect any trade deal at all until it’s clear that President Trump will emerge victorious in 2020.
As of midday, the DJIA was up 1.6%, over 400 points, the NASDAQ rose 1.6%, and the S&P 500 gained 1.3%.
Real Reasons For Hope Domestically
That said, the U.S. labor market and consumer spending have displayed a remarkable resiliency in the face of manufacturing woes and inverted yield curves. The Labor Department today reported initial claims for state unemployment benefits increased 1,000 to 217,000 (seasonally-adjusted) for the last week of August, an acceptable number that didn’t move markets.
Further, the Institute for Supply Management reported that non-manufacturing activity rose to 56.4 in August, up from 53.7 in July, beating forecasts by a wide margin. In other words, apart from manufacturing, the U.S. economy is showing remarkable growth.
From a Reuters article:
Extreme uncertainty over trade issues has soured the sentiment of some in the business community, but companies continue to hold on tight to the workers they have and are also onboarding new workers at a fast clip,” said Chris Rupkey, chief economist at MUFG in New York. “This isn’t what a recession is supposed to look like.”
As noted above, private payrolls beat expectations, and the market looks with much anticipation to tomorrow’s non-farm payrolls report.
In this tentative climate where hope has obscured pessimism (and perhaps common sense), a good non-farm number ought to lift markets, whereas a bad one will likely trigger a deep selloff.