The most important economic data each month is the employment data from the prior month, released on the first-Friday of each new month -- today.
However, all data and market thinking have been overwhelmed by Mr. Trump’s adventure in trade and tariffs.
March payroll statistics are mis-described in media today. Not faked, just emphasis mistaken, many saying that job growth was a weakside “miss.” 103,000 new jobs were about half of forecast but an ideal result for the Fed and markets. That’s a sustainable pace, unlike January’s 176,000 and February’s incredible but confirmed 326,000. Every internal measure of jobs stabilized in March except average hourly wages which accelerated to a 3.6% annual pace. In an ordinary April, both stocks and bonds would have liked this employment report, stocks up, rates holding.
Mr. Trump last night tripled-down on his tariff threat, first steel and aluminum, then $50 billion of China exports, and last night another $100 billion blast at China. Markets open all over Asia instantly fell hard. The Dow has lost 600 points near the close today, will end this week only about 200 lower than it started, but during the week vibrated across a 1,400-point range, 6% of the Dow value -- instability obviously holding interest rates down.
The most anxious party is the Fed. It is in the middle of its most delicate process: how to prolong an economic expansion while keeping inflation in a box. The March jobs “miss” is reassuring, but other data are plenty strong for the Fed’s plan for two more hikes this year. The twin ISM indices are roaring: in April manufacturing at 59.3 and the service sector 58.8.
Buried in the ISM survey is the first potential sign of TTT trouble (Trump Trade Tariff): the index of prices jumped to 78.1, one of the highest ever, the leap attributed to buying and hoarding of materials before TTT will take effect.
Two Fed governors spoke about TTT effects complicating the Fed’s life. Tariffs always slow the economies involved, so should the Fed pause its hikes? But tariffs also always raise domestic prices for goods previously imported, so the Fed should accelerate its hikes?
We know a lot about trade, and negotiating, and the unique process of trade negotiations.
Evidence of trade is commonplace in archaeological digs at sites tens of thousands of years old. The dislocation of trade has been with us always, too. If your tribe meets another whose flint-knapper is better than yours, then your knapper either will learn the new skill or is due for a career change. And if he can’t learn, his tribe will have to find things to trade for the better points and blades. And this timeless lesson: quickly both tribes are better off. You’ve got better tools, and they’ve got the hides, shells, and fish which you traded. Only your knapper is discomfited.
So it was for most of human history, with one complication: greed. We are hard-wired to want the better of any trade, beggaring our trading partners. We knew better 500 years ago, the Hanseatic League and the Dutch understanding that growing balanced trade was good for both parties. Further, the objective is to export high-value-added goods in exchange for low (commodities), a trade in which neither party is beggared but the high-value exporter becomes wealthier.
Despite this knowledge, the all-time expression human greed complicated trade into the 1930s, with catastrophic results. Gold. With gold as a means of exchange, inevitably most of us wish to come away from any trade with more gold than the other guy -- “mercantilism.” The residual result today is the infernal desire of nations for a trade surplus, today’s arch-villains Germany and most of Asia.
The first truly modern trade deals grew out of Bretton Woods in 1944, in which a wrecked world agreed to abandon gold, and accept a dollar-based system of floating exchange rates. The IMF followed in 1945, the General Agreement on Tariffs and Trade (GATT) in 1947, the European Common Market in 1957, NAFTA in 1989, and the World Trade Organization (WTO) in 1995 -- each one in a continuous process of refinement to adjust to changing patterns and contents of trade, and each and all together a fantastic boon to humankind.
Negotiating these things must be done in private. Trade deals inevitably acknowledge the obsolescence of the work of some citizens (Americans no longer make shoes in Fall River MA) while favoring superior local skill (Indiana soybeans). Democracy does not function well as an allocator of pain, no matter who benefits. Hence “fast-track” trade deals are passed in the dark of Congress. Some nations are good at softening the impact of obsolescence, via compensation and retraining, notably Europe although with a cost of rigidity. The US has been awful, but benefits from flexibility.
Trade deals always work best in groups of nations rather than bi-lateral, especially true now as supply chains for single products have become multi-national. My Swedish Volvo has a German engine and Japanese transmission. Your i-phone was conceived here but made and assembled and re-exported and re-imported all over hell and gone. Group negotiating also corrals the serial miscreants and cheaters.
What to do with modern mercantilists of all kinds, especially slippery types who insist they should be allowed tariff protection because they are “developing”? The Trans-Pacific Partnership negotiations among twelve nations excluding China was the perfect vehicle to rein in China’s abuses, but cancelled by Mr. Trump, the other eleven proceeding without us.
More important than anything, of course: never, ever attempt to muscle another nation in public. All will fight even if they know they are mistaken. Emmanuelle Macron, president of France last week: “We talk about everything with a friendly country that respects the rules of the WTO; we talk about nothing when it is with a gun to our head.”
At the deepest level, Mr. Trump’s trade offensive is irrational. It has a tiny base of domestic political support, and will do more harm than good. His newest hire, Larry Kudlow with the mission of combative advocacy for administration policy has spent his first week trying to tell markets that we’re not really going to do what Mr. Trump is doing.
Everyone outside the US is provisionally treating Mr. Trump as a temporary US aberration. The longer this goes on, the deeper the risk to global trust in the US, which is our most-prized and hardest-won possession.
The US 10-year T-note has stalled. The effects of tariffs and general chaos are clear:
The US 2-year T-note is more puzzling. It has stalled also, when it should be moving up, anticipating the Fed’s next hikes. Maybe signifying a Fed pause, or just addled by idiocy: