Overnight, US-Sino trade relations deteriorated further as the US confirmed USD34bn of tariffs on Chinese imports came into effect. China stated that it has been forced to retaliate and imposed countermeasures. We view the continued deterioration in the trade environment as a negative risk to global growth.
Not surprisingly, the discussion on trade in the June FOMC meeting minutes (released yesterday) was an area of interest. The minutes noted that ‘many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.’ Plus, ‘Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending.’
Fed Chair Jerome Powell also commented on trade when speaking on the policy panel at the ECB forum on Central Banking in June: ‘changes in trade policy could cause us to have to question the outlook’ and ‘for the first time we are hearing about decisions to postpone investment, postpone hiring, postpone making decisions. That is a new thing. If you ask is it in the forecast yet, is it in the outlook, the answer is no. And you don’t see it in the performance of the economy.’ Philip Lowe, Governor of the Reserve Bank of Australia, who was also on the panel described the worsening trade situation as ‘incredibly disturbing’.
Today’s June non-farm payroll release continued to point to a robust labour market: 213,000 jobs were added which was above expectations of 195,000 jobs created and the previous month’s figure was revised up to 244,000. The unemployment rate increased to 4% versus the prior month’s reading of 3.8% and the participation rate increased to 62.9%. Importantly, average hourly earnings were slightly below expectations rising 2.7% yoy compared to the previous month’s figure at 2.7% yoy. Overall, this release was consistent with the FOMC minutes which noted ‘members judged that information received since the FOMC met in May indicated that the labor market had continued to strengthen and that economic activity had been rising at a solid rate.’