US job market remains robust
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US Jobs & Market Recovery
Hype surrounded Friday's job report because if numbers were below expectations, it would've been clear evidence that uncertainty and tariffs have been taking a toll on the U.S. economy. But no such luck! 177,000 jobs were added, significantly more than the forecasted 138,000, and the unemployment rate remained at 4.2%. The market rejoiced, with the S&P 500 up over 2%. The 10-year Treasury yield added 10 basis points as market anticipation for Fed cuts decreased.
Monetary policy implications are significant. Post-Friday, the market transitioned from predicting four 25 basis point cuts by year's end to only three. The labor market isn't wilting in the current rate environment, giving the Fed room to focus on inflation. Wage growth increased only 0.2% month-on-month, validating the Fed's decision to stand pat on rates.
Some pessimism is warranted. March and February's readings were downgraded by 58,000 jobs in total, bringing the three-month average down to 133,000. According to David Rosenberg at Rosenberg Research, around 40% of the headline increase came from the "birth-death" model. Rosenberg suspects that, accounting for a birth-death skew and the downward revisions, April's payroll report actually showed a decline of 11,000 jobs. But it's difficult to gauge the birth-death model's accuracy.
Friday's report had its upsides, too. Over half the job growth came from cyclical industries (private, excluding healthcare) and 518,000 people entered the labor force. The rate of federal job losses slowed last month. Despite concerns over Doge's impact on the federal government, the slowdown in job losses was also revised down for March.
All in all, Friday's report was encouraging. Like the GDP report, it indicates the U.S. economy is staying resilient. But there are still challenges ahead. Tariffs have yet to take their full toll, and employers may start to feel the pressure.
China
China is said to want trade talks with the U.S., and Trump seems flexible on tariffs. If these signals are genuine, that's fantastic news. But Unhedged is a bit skeptical. Despite appearing open to negotiations earlier this year, the Chinese government and people have shown determination to stay strong. Trump and his trade adviser Peter Navarro have historically shown reluctance to negotiate with China.
If China is softening its stance, it's likely because its economy is shaky while the U.S. enters the trade conflict with momentum (see above). According to official statistics, China's economy grew 5.4% year-over-year last quarter, above expectations and higher than China's goal of 5%. However, Chinese macroeconomic data should be taken with a grain of salt. Other indicators suggest weakness.
China may rely on export surges to replace US demand, but finding new buyers will be tough. Europe could erect its own trade barriers, and Chinese domestic consumption has shown no signs of life. Low foreign demand could exacerbate China's deflationary issues. China's inflation looked better last month, with core CPI jumping above 0 after a month in negative territory. But if the manufacturing sector cannot find new buyers, domestic supply will increase and prices will drop further.
Recent soft data has been weaker. Consumer confidence is at an all-time low. China's Caixin manufacturing PMI, released last week, showed that manufacturing contracted in March, driven by a collapse in the new orders reading, particularly new export orders. Inventory levels also fell, a sign that businesses are pessimistic.
For the past several months, China boosters have dismissed economic concerns, relying on the promise of economic stimulus. But the stimulus has been more of a pop gun than a bazooka. And it looks like even the pop gun could go silent soon. According to Zichun Huang and Leah Fahy at Capital Economics, the budget deficit grew by 40% annualized in the first quarter, double the planned rate of fiscal expansion for this year. China will need to borrow more (much more) to maintain the current level of stimulus, and even that has not been particularly effective.
While China may have the political advantage in prolonged negotiations, economically, it holds fewer cards.
One Good Read
Chinese Diversification
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[1] All FT newsletters: Visit here[2] IMF: China GDP growth forecast cut from 5.5% to 4% for 2025: Reuters[3] Cathay Bank: U.S. and China in 2025: navigating a new economic order: Cathay Bank[4] Global growth forecast cut to 2.8%: IMF
- The strong job growth in the US, with 177,000 jobs added and the unemployment rate remaining at 4.2%, might deceptively signal a robust economy, but words from David Rosenberg at Rosenberg Research suggest a more complex picture, hinting at a potential decline of 11,000 jobs when taking the "birth-death" model into account.
- While the US economy appears resilient given the latest job report and GDP data, the impact of tariffs is yet to be fully felt, which could potentially have a significant impact on businesses and employment in the near future.
- China's economy grew 5.4% year-over-year last quarter, above expectations and higher than China's goal of 5%, but this figure should be taken with a grain of salt, as other indicators suggest weakness in the Chinese economy.
- Though China might seem open to trade talks with the US, the Chinese government and people have shown determination to stay strong, and there is a degree of skepticism regarding their sincerity, as Trump and his trade adviser Peter Navarro have historically shown reluctance to negotiate with China.
- Despite China's growth statistics, recent soft data has been weaker, with consumer confidence at an all-time low, manufacturing contracting, and inventory levels falling, suggesting businesses are pessimistic.
- The US economy, under the leadership of Warren Buffett at Berkshire Hathaway, will face various challenges in the coming months, as businesses brace for the potential impact of tariffs on the job market and overall economy. Meanwhile, China's weakness might lead to a dwindling number of new buyers for Chinese exports, increasing deflationary issues and putting pressure on the Chinese government to find alternative strategies to maintain economic growth.
