Job Market Stays Resilient The U.S. economy is still churning out jobs at a steady pace even as markets wobble over fears that a U.S.-China trade war could unsettle global growth.

U.S. nonfarm payrolls rose a seasonally adjusted 103,000 in March after February’s outsize increase of 326,000, the Labor Department said Friday. That extended a historic streak—employers have added to payrolls for 90 straight months in the longest continuous jobs expansion on record. And it picked up of late: For the first three months of the year, hiring averaged 202,000 a month, up from 182,000 a month in 2017. (…)

Average hourly earnings for all private-sector workers rose 2.7% in March from a year earlier—in line with annual gains in recent months.

Those raises have been skewing toward managers. The annual growth in wages for nonsupervisors was 2.4%, a pace that has held steady since December. Hourly wages haven’t increased at better than a 3% annual rate in nearly a decade. The last time unemployment was this low, in late 2000, nonsupervisor wages rose 4.3% from the prior year. (…)

A broad measure of unemployment and underemployment that includes Americans in part-time jobs who want full-time work, in addition to discouraged individuals who have stopped looking for work, fell last month. Known as the U-6, the rate was 8% in March, which is still higher than 6.9% in December 2000. Its elevated level suggests that slack remains in the labor market that could prevent wages from breaking out. (…)

U.S. employment reports are like recent equity markets: very volatile and highly unpredictable. Even the Household Survey looks farcical with March printing –37k after +1.2M in Jan-Feb..Must be the weather!

But the wage numbers are providing an apparent sense of stability, staying at +2.7% YoY and well within their range since July 2016. Even the last 3 months are at +2.7% SAAR after the 2017 year-end boost likely induced by the tax reform. Drilling down to Production and Nonsupervisory employees, some 80% of the work force and the real threat to profit margins, monthly wages are very stable at a slow +2.0% SAAR in Q1’18 and +2.4% YoY for the 4th consecutive month. This chart plots quarterly changes in nominal wages for the bulk of working people. Pretty flat trend below a 2.5% a.r..

Is this good news,or bad news, considering the trends in inflation threatening real wages? (We get March CPI this Wednesday). Contained nominal wage growth is good if you worry about inflation picking up…but inflation has already picked up to almost match nominal wage growth, squeezing real wages to nearly zero growth. In fact, real wages have increased at less than 1.0% YoY every month since October 2016 to a low of +0.2% YoY on average since October 2017.

The reality of this “fundamentally strong economy” as bubblevision pundits say, is that it is performing on a very fragile tightrope.

Americans have outspent their income every month since March 2016, boosting real expenditures by 1.2% in each of the last 2 years, contributing an average of +0.8% to the +2.5% average GDP growth during the period. A return to fiscal discipline would take real spending from its current +2.8% growth rate down to the +2.0% range and shave 0.6% to GDP growth. Recall that yearly employment growth peaked in 2015 at +2.1%, dropping to +1.8% in 2016 and +1.6% in 2017.

Post hurricane-induced spending in Q4’17, Americans must live within their means. Real retail sales have declined in each of the last 3 months.

The employment momentum is behind us and wages are not accelerating to take the slack to offset rising inflation. Something has to give very soon to keep the economy humming: higher wages or slower inflation. Based on current evidence, neither seems about to happen. There’s a word for this: stagflation.

• Americans Face Highest Pump Prices in Years Americans are spending more at the pump than they have in years. Prices could rise even higher just as drivers hit the road for family vacations.

SYNCHRONIZED GROWTH OR SYNCHRONIZED PEAK?

Cracks Form in Global Growth Story, Rattling Investors Investors, on edge over the tech rout, the budget deficit and the threat of a trade war, are starting to doubt that the world is going to snap out of its prolonged post-crisis lethargy.

(…) In the U.S., gauges of manufacturing and services activity have been pulling back. Retail sales have fallen for three straight months, construction spending decelerated at the start of the year, and auto sales have largely plateaued. On Friday, government data showed a sharp slowdown in U.S. jobs creation last month, reversing some of the labor market’s recent momentum. (…)

In Germany, industrial output took an unexpected 1.6% tumble in February, a reading thatCitigroup Inc. economists called a “shocker” on Friday. Business and economic sentiment surveys in the euro bloc’s largest economy have pointed to worsening growth expectations. Meanwhile, years of monetary stimulus in Japan have led to only a modest pick-up in growth.

Manufacturing activity was down in March from the previous month in 21 of 30 countries, led by declines in Asia and Europe, according to Bespoke Investment Group. (…)

Citigroup Inc.’s global surprise index tipped below zero on Friday for the first time since August, indicating that economic data in aggregate are missing economist forecasts rather than beating them. (…)

  

THE ART OF THE DEAL vs  THE ART OF WAR

Gleaned here and there in the last several days:

• Mr. Mnuchin, speaking on CNBC, said it would take time for the announced and potential U.S. tariffs to take effect, and meanwhile, “we’ll continue to have discussions. But there is the potential of a trade war.”
• Kudlow sought to assure investors there was no trade war under way after the initial $50 billion U.S.-China tit-for-tat tariff threats. Nothing has been enacted, Kudlow said on the cable networks, and nothing may be enacted.
• Those concerns deepened Friday after Chinese Commerce Ministry spokesman Gao Feng acknowledged the two governments were now in a battle and described President Donald Trump’s consideration of penalties on an additional $100 billion in Chinese goods as “extremely wrong.” “China is fully prepared to hit back forcefully and without hesitation,” Mr. Gao said. He said that China has put in place “detailed countermeasures” and those measures “don’t exclude any options.” Mr. Gao didn’t elaborate.
• “The good news is, President Xi [Jinping] and President Trump have a very good relationship,” Mnuchin said. “They speak regularly. There is clear understanding that we have mutual interest in reducing the trade deficit.”
• Mr. Gao on Friday denied that Beijing and Washington were engaged in any negotiations and said they haven’t done so “for a period of time.” “Under such circumstances, it’s even more unlikely for the two sides to engage in any kind of negotiations,” Mr. Gao said.
• “Trump and Lighthizer are like-minded,” said William Reinsch, a former trade official now at the Center for Strategic and International Studies. “There is a negotiating strategy of bullying, intimidation, and threats to soften up [the adversary]. Then, maybe make a deal.”
• Jorge Guajardo, a former Mexican ambassador to China and now a Washington consultant, has seen up close how Beijing can pressure companies and wear down governments. “The big question is, ‘Will the U.S. blink?’” he said. “Or will they stay the course so China is forced to understand there is a new way of doing business.”
• In a WABC Radio interview Friday, [Trump] said: “I’m not saying there won’t be a little pain but the market’s gone up 40-42 percent, so we might lose a little bit of it, but we’ll have a much stronger country when we’re finished.”
• Xi Jinping effectively is president for life and needn’t worry about a backlash from trade tensions. In contrast, Trump and the Republicans must face the voters, with midterm House and Senate elections looming in November.
• (…) despite the drop in soybean futures on Wednesday, farmers are sticking to their planting plans. The reasons are political as well as agricultural. Her contacts think that if China does levy tariffs on beans the U.S. government would make up for losses with subsidies. Before the November midterms, of course.
• Even so, the specter of a trade war still looms over the agricultural sector, not just farmers, but also equipment dealers and banks in the Farm Belt. Indeed, lenders had become stricter, even before the trade flap arose, she adds.
• [Sunday]: Treasury Secretary Steven Mnuchin said “I don’t expect there will be a trade war” on CBS, while National Economic Council Director Lawrence Kudlow emphasized that “nothing has happened so far.”
• President Donald Trump also wrote on Twitter that “China will take down its Trade Barriers because it is the right thing to do,” that taxes will become reciprocal and a deal will be made on intellectual property.
• (…) the trade dispute may be resolved through negotiations and that the “process may turn out to be very benign,” according to Kudlow.
• (…) we do need to get tough with China. But we need to do so in a way that we do not spark a trade war.” Sen. Susan Collins (R-Maine) called it a “very delicate balancing act.”
• “If we do get into a trade war, even a small one, it will hamper growth. And you can see that in the stock market, people don’t like it,” said economist Art Laffer, an informal adviser to Trump who helped sell the president’s tax plan last year.
• The odds are still good that the trade tiff ends with China giving Trump some small to moderate concessions before the full-blown tariffs take effect. Laffer, who speaks with the president and his top economic advisers, said Trump told him the tariff threats were just a bargaining tactic.
• “I don’t think we should lose sleep over the tariffs. They are bad economic policy, and both sides have got far too much to lose to build this trade skirmish into an all-out trade war,” said David Kelly, chief global strategist at J.P. Morgan Asset Management.

From David R Kotok, Chairman & Chief Investment Officer, Cumberland Advisors:

(…) Chinese policymakers know the US system and thoroughly understand US politics. They know what the midterm elections mean, and they see how Trump has intensified the political activism of the Trump haters while not energizing the Trump lovers. They know that presidents are vulnerable in midterms to start with – history demonstrates that fact. They know that a Democratic party swing in the midterms means a Pelosi-led House and a bill of impeachment on Trump. And they know the midterm elections are only six months away.

The Chinese political leadership doesn’t face midterms. Xi is now president for life if he wants to be and is commander in chief of the armed forces and the head of his political party, which is the only party in China. He is patient. He also knows that in another 5–6 years the Chinese economy will be the largest in the world, and the US will be second. And he knows that China is already the largest if you measure by manufacturing alone rather than including services. He knows that in the US 17% of GDP is produced by the healthcare sector. Xi knows. His advisers know. Many of them were trained in the US. (…)

Rest assured that Chinese policymakers have a multi-year war plan for trade-related conflicts with the US. (…)

The U.S. actually completed a renegotiation of its trade agreement with South Korea on March 28, the first major trade deal under President Donald Trump who, in the past called the Korea-U. S. Free Trade Agreement a “horrible deal” and blamed it for expanding the U.S. trade deficit. Trump called the agreement a “ Hillary Clinton special,” and said his administration had renegotiated it to better serve American workers.

Here’s how Holman W. Jenkins, Jr. summed up the deal in the March 30 WSJ:

This week the White House announced its latest triumph, an agreement with South Korea to extend the tax until 2041. This “victory” will cost Americans thousands of dollars each on future pickup-truck purchases. And so much for the tantalizing promise of a Hyundai pickup anytime soon.

Here’s the story of the “chicken tax” as Jenkins tells it:

When LBJ sought to retaliate against European import restrictions on U.S. frozen chicken, a United Auto Workers chief caught his ear with complaints about a Volkswagen pickup truck (based on the VW microbus) then arriving on U.S. shores. Voilà. Fifty-five years later, the 25% “chicken tax” is why the Big Three have morphed into lucrative pickup-truck companies attached to semi-embarrassing sedan businesses that barely break even. And now we know Donald Trump’s trade policy intends to keep it that way.

(…) The chicken tax is a kludge that helped the Big Three survive their weird obligation to patronize a UAW labor monopoly while foreign-born auto makers are free to tap a competitive U.S. labor market. The chicken tax helped Detroit endure fuel-economy rules that required it to build money-losing small cars in high-cost domestic factories. (…)

The chicken tax explains why interesting, diverse, drivable pickups that sell by the millions in the rest of the world are unavailable in the U.S. market, like the Toyota Hilux, VW Amarok and the Mercedes X class.

It explains why, even though trucks are the most profitable and largest-selling vehicle category, Americans have only six brands to choose from—and 30-plus brands of sedan.

It explains why the VW Tanoak, a prototype pickup that wowed visitors at the New York Auto Show this week, won’t be coming to the U.S., ever. (…)

This at least gets the nature of Donald Trump’s trade policy right. He, like most politicians, is not really so focused on expanding or freeing up trade. He likes dispensing goodies from the favor factory. The pockets of U.S. consumers are picked for the benefit of specific U.S. companies and industries. (…)

From Donald Trump this morning:

When a car is sent to the United States from China, there is a Tariff to be paid of 2 1/2%. When a car is sent to China from the United States, there is a Tariff to be paid of 25%. Does that sound like free or fair trade.  No, it sounds like STUPID TRADE –  going on for years!

A strong rumour (Trump Team Pushes Toward Nafta Deal Amid Congressional Pressure) has it that a tentative agreement on NAFTA will be announced this week. It will be very interesting to see how the U.S. will renegotiate the “worst trade deal ever made”.

From the “chicken tax” to the “game of chicken”, here’s the same Jenkins last Saturday:

(…) Right now a bargaining game is under way that could leave the world trading system better off, with China cheating less. Not the least benefit, this would strengthen the political sustainability of trade in the U.S. and other Western nations—an outcome of high strategic value even to China.

Both sides are in the crotch-grabbing phase at the moment. They want their threats to be treated as credible even if they aren’t.

So eager are some Americans for a Donald Trump failure, though, they rush to convince the world that Americans can’t tolerate the slightest risk of pain or loss in a good cause. U.S. soybeans are on China’s target list, but let us calm ourselves. If China buys Brazilian soybeans, the world doesn’t end. Brazil’s customers would buy U.S. soybeans. The net effect would be only slightly damaging to all concerned, except for the rail and shipping companies that would benefit from the world opting for second-best logistics in getting the global soybean crop to market.

Ditto Boeing . Its jets are on China’s retaliation list too, but a reality check is in order. Boeing and Airbus have backlogs stretching out almost a decade. If a Chinese carrier cancels a delivery for next year, it can’t just cut the Airbus line, at least not without paying through the nose for another customer’s delivery slot. Or it could settle for an older, second hand aircraft, knowing it would pay a penalty in fuel efficiency, passenger amenities and maintenance downtime that could be the difference between a successful service and a money-losing one.

Donald Trump’s rhetoric often fails to notice that trade is a win-win, but the peanut gallery should not lose sight of the same basic context in today’s trade fight: Both sides are putting guns to their own heads and saying, “Give me what I want or the idiot gets it.”

Such incentives strongly favor the parties reaching a deal and declaring victory for the benefit of the home fans. Both know the U.S.-China trade relationship is too important not to put it on a sounder basis.

So the real question is, “Do we have confidence in the wisdom and perspicacity of the Chinese and U.S. administrations?” Mr. Trump is not a child. He has been in negotiations all his life. It’s the one skill he brought to office that can’t be gainsaid.

What’s more, Mr. Trump is not a bridge burner, whatever you think of his Twitter habits. He is always ready to be best friends tomorrow with whomever he’s at war with today. His relationship with the “failing New York Times” is the cognoscenti case in point. No news organization has been so relentlessly denounced and yet so relentlessly courted by Mr. Trump. He can’t give up. He is not likely to lead us down a path of permanent hostility with China (or anybody else) from which there is no return.

The Chinese deny it but they know the U.S. has legitimate gripes, especially with respect to Beijing shaking down U.S. companies for their trade secrets as a price for getting access to the Chinese consumer.

China has gotten by with claiming it’s a poor, backward country, but such excuses no longer suit its own idea of itself. Look for a settlement in which Beijing insists it never engaged in technology theft and now will stop. It will launch new laws and courts to hear complaints of its foreign partners. Sure, these reforms you wouldn’t take to the bank right away. But, long term, China’s interest in profiting from its own intellectual property should propel it in the right direction.

Americans, though, have to be ready to accept some risk if they want China to change its behavior. Danger can always be avoided by bending over for whatever China wants. Happily, the U.S. economy is strong right now, verging on a labor shortage as rising wages can’t lure the Obama-discouraged back into the workforce fast enough.

Stock markets will never be happy with uncertainty, and you might wish to put your portfolio in a medically induced coma for the duration. But it pays not to sell America short, given its inherent, deeply rooted strengths. These strengths are admired by others, including China. They were apparent even on President Obama’s watch, with all its dreary regulatory and antibusiness overkill. His tenure will still be remembered, if dimly, as the time when America’s frackers revolutionized the world energy scene.

Mr. Trump is not the idiot his detractors say, and nobody says the Chinese are idiots. The omens are propitious for a major advance in trade relations. But the Chinese should remember one thing: Mr. Trump is a teetotaler, so the eventual congratulatory toasts should be nonalcoholic.

Meanwhile,

• U.S. Looks to Protect Domestic Car Makers From Foreign Competition The Trump administration is pursuing ways to protect domestic vehicle manufacturing by forcing imported cars to meet stricter environmental rules, a move that would make them more expensive

The cost of meeting the stiffer import standards would, at least in part, be passed along to U.S. consumers. This style of “nontariff barrier”—a protectionist stratagem the U.S. has long condemned in other countries—is designed to reduce the relative cost of cars manufactured in the U.S., by American workers, the officials said.

President Donald Trump has asked the Environmental Protection Agency and several other agencies, including the Commerce and Transportation departments, to pursue plans to use such laws as the Clean Air Act to subject cars made overseas to strict emissions-standards testing and reviews when entering the U.S. The rules could effectively require more expensive technology on some foreign cars or subject those cars to more expensive hurdles that can be billed to the manufacturer or importer. (…)

Some in the administration see the idea as too radical, and the considerable legal challenges have already delayed the plan. (…)

More than 75% of Detroit’s sales are trucks or sport-utility vehicles, and those typically have been sourced to local plants.

Still, one of the biggest challenges for policy makers is how to differentiate between foreign and domestic cars. Auto manufacturing is a global industry, with companies often making and shipping parts across borders for assembly elsewhere.

Roughly three-quarters of the 17.1 million vehicles sold in the U.S. are built in Nafta factories, including those in the U.S.—11 million are assembled on U.S. soil. Of the remaining nearly four million shipped from outside North America, 1.7 million come from Japan, 820,000 are shipped from Korea and about a half-million are imported from Germany. (…)

• EUROPE HAS A LOT TO LOSE FROM TRADE WARS

(…) For all the talk about ‘Euroboom’, about one quarter of euro area GDP growth in 2017 was driven by net trade.

Euro area exports amounted to 47% of GDP in 2017 compared with 12% in the US. Importantly, the euro area is also highly integrated into global value chains. The import content of exports, which the OECD calculates as the foreign value-added as a share of total gross exports, indicates just how dependent euro area countries are on the global manufacturing cycle driving investment at home. By this measure, euro area countries look more exposed to fluctuations in global trade than most advanced economies, with foreign value-added accounting for 25-27% of German, Italian, French and Spanish exports, compared with 15% of US exports. Countries with higher foreign value-added include China (29.5%) and smaller emerging market economies.

The US alone accounts for 13% of euro area exports, followed by the UK (12%), China (7.5%) and Switzerland (6%). Even if the EU is exempted from US tariffs, the latter could weigh on activity through other channels. The impact on the price and volume of intermediate inputs could be amplified by third countries adopting retaliatory measures. Last but not least, a sustained downturn in business confidence could hit investment eventually.

• Europe’s Boom Reawakens the Ghost of Crisis Past: Debt Economic optimism, ultralow interest rates and fierce banking competition have pushed private-sector lending to its highest level since the financial crisis. That would be good news if it wasn’t for the region’s already high debt.

• It’s a global phenomenon (Guggenheim, Pimco Pin Next Economic Pain on Corporate Debt):

(…) Debt levels crept up as central banks suppressed borrowing benchmarks, with the proportion of global highly-leveraged companies — those with a debt-to-earnings ratio at five times or greater — hitting 37 percent in 2017 compared with 32 percent in 2007, according to S&P Global Ratings. (…) “As funding rates rise, the burden from higher borrowing costs will end up stressing corporate America, which means companies will look for other ways to reduce expenses,” Minerd said. “Layoffs will feed into the labor market, reduced capital expenditures will directly impact GDP growth, and all of this will drive the probability of recession higher.” (…)

Very related: LIBOR’S LABOR

China Is Studying Yuan Devaluation as a Tool in Trade Spat

TECHNICALS WATCH

Lowry’s Research says that “Friday’s market sell-off qualified as a 90% Down Day, with NY Down Volume at 91% of total Up/Down Volume.  NY Composite Volume, though, was 3.4 billion shares, below the 30-day average of 3.6 billion shares.  This relatively light volume suggests that, while selling was intense, it was likely not heavy enough to qualify as panic selling.”

The bull seems to want to rise up again but trade worries bring it back sitting on its 200-day moving average. Actually, Friday’s close was a touch below the still rising 200-d. m.a.. (chart from Ed Yardeni).

Steve Blumenthal:

Clearly, there are cracks in the long-term secular bull market trend.  The number of S&P 500 Index stocks below their 200-day MA is now 60%.  CMG NDR U.S. Large Cap Long/Flat Index is close to signaling a reduction to 80% large cap exposure from 100% and the 13-week trend line vs. the 34-week trend line is turning down (though still bullish).  Sell signals occur when 13-week MA line crosses below 34-week line.  It looks like this (red circle current level).  Note too the prior bull and bear market cycles: