April 6, 2018

Stocks gapped down this morning on trade war tensions (not the jobs report). The Dow is currently down 364 pts and the SPX is down 1.17%. The defensive sectors—utilities, consumer staples, real estate—are not surprisingly faring better than cyclicals, but just about everything is in the red. The VIX Index is up a bit to trade just under 20. VIX April futures are around the same level. So the options market doesn’t seem to expect a full-blown trade war. European stock markets are poised to close slightly lower and Asia was mixed overnight. The dollar and most commodities are down a bit today. WTI crude oil is trading down around $62.70/barrel, continuing in the $59-$66 range. Gold is up about .4% this morning (and 2% on the year). Bonds are trading higher as yields dip. The 5-year and 10-year Treasury yields are hovering around 2.6% and 2.79%. 

The monthly jobs report was a bit weaker than expected, but some of that was due to weather. The labor market is still very strong. Total payrolls rose 103,000 vs. economists’ consensus forecast for 185,000. Goldman Sachs’ Jan Hatzius says temporary weather issues shaved off about 150,000 jobs. The unemployment rate held steady at 4.1% and the under-employment rate dipped to 8.0% (an 11-year low). Average hourly earnings growth accelerated to 2.7% y/y, but that was expected. So wage inflation is rising, but at a very manageable rate. This is probably the key takeaway from the report. Further, the average workweek held steady at 34.5 hours. The labor participation rate, which hasn’t budged in two years, edged lower to 62.9%.  Overall, this report won’t change much in the Federal Reserve’s interest rate outlook.  

President Trump is again engaged in a war of words with the Chinese. This morning, he Tweeted that the World Trade Organization (WTO) is giving an unfair trade advantage to China due to its classification of that country as “developing.” That much is true. Last night, Mr. Trump asked the US Trade Representative to consider an additional trade tariffs on $100bil worth of Chinese imports. In response, China’s Commerce Ministry issued a statement that it is ready to fight a trade war. “The Chinese side will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people.” Both sides say no trade negotiations have yet begun. Bloomberg reports that even if China wanted to match Trump’s proposed tariffs on $100bil in imports from the US, it couldn’t. That’s because “it wouldn’t have enough American goods imports to target.” That is a telling statement. 

Wall Street strategists are queued up on CNBC to explain their market views in light of the tremendous volatility we’ve seen this year. Tony Dwyer of Canaccord says the recent correction “is so not about fundamentals.” Calling it a “shock drop,” he believes the fundamentals are still intact, and that’s what drives the intermediate and long-term direction of the stock market. He urges investors to think about what really matters: the yield curve, economy, corporate earnings. His conclusion is to buy stocks. Bond fund manager Jeff Gundlach, on  the other hand, says 2018 is “payback time” after a very easy 2017. This will be a negative year in the stock market. Economic data won’t come in as uniformly positive as it did last year, primarily because the Fed is raising rates. 

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