The robust U.S. jobs report on Friday managed to offset concerns of a trade war, at least for now. The 313,000 additional jobs took economists and markets by surprise as the figure exceeded even the highest expectations of 300,000 noted in a Reuters survey. Although employees may not like the 0.1% rise in average hourly earnings, employers liked it and markets loved it. This is simply because the modest increase in wage growth indicates that the Federal Reserve will continue to have some sort of slack in the labor market to deal with and thus keep the Fed on course for three rate hikes in 2018 instead of four. After all, the combination of robust economic data and limited inflation has been a key factor in keeping the bull market alive.
The NASDAQ Composite Index climbed to a fresh record after the release of Friday’s jobs report. The S&P 500 is 10% higher from the trough recorded on 9 February, and fixed income markets aren’t showing any signs of anxiety, with U.S. 10-year bonds yields remaining well below the 3% critical level.
Appetite for risk spread to Asian markets today with the Nikkei 225, Hang Seng and Kospi all advancing more than 1%. Futures also indicate a positive start to Europe today.
Other factors that boosted appetite for risk last week were Mr. Trump’s acceptance of a meeting with North Korea’s Kim Jong Un, though I didn’t see it as a game changer for equity investors. News that the U.S. has opened the way for more exemptions from its steel and aluminum tariffs on Friday may have indicated that we’re still far from an all-out trade war. However, it seems now that Trump’s target is not Canada, nor Mexico or the E.U., but China. China’s Minister of Commerce, Zhong Shan, said China does not want a trade war and will not initiate one, but warned that any trade war with the U.S. would only bring disaster to the world economy.
This week, U.S. economic data will be closely scrutinized, particularly February’s CPI report, as it’s just a few days before next week’s Federal Reserve meeting. Consumer prices are expected to have cooled down last month after surging 0.5% in January, but the headline CPI is still forecasted to rise 2.2% YOY, from 2.1%. Investors are likely to give more attention to the core CPI, and if it remained steady at 1.8% there would be no reason to think that the Fed will take an aggressive stance when it meets.
Retail sales are expected to rebound after falling for two consecutive months. If they met the anticipated 0.3% rise, this may suggest that the tax cuts are finally encouraging consumers to save less and spend more.