Nonfarm Payrolls June 2018

The US labor market continues to chug along, adding 213,000 jobs in the month of June. Manufacturing, which was expected to face the brunt of the pressure from tariffs and trade policy, showed remarkable resilience with 36,000 new jobs. Meanwhile, strength was also seen in professional and business services, health care, construction and mining. The unemployment rate did tick up 0.2% to 4.0% but that was in tandem with an equivalent increase in labor participation. The labor participation rate for the month of June came in at 62.9% and revisions to prior reports added 37,000 more jobs than previously reported. All-in-all payrolls are increasing at a pace of 200,000/ month for the trailing 12-month period. A relatively soft spot in today’s figures was hourly earnings. In light of recent datapoints, one would have expected a steeper trajectory in wage pressures; however, wage inflation held at a year over year gain of 2.7%.

While it has been a holiday week, it has been a busy one at TWP. Trade and tariffs, central banks, economic reports, and tweets have been on our minds and in our calculations around the clock. So, I will get right to the point: assets look surprisingly well priced. Ordinarily, we would have expected the convergence of political bluster, new data, and policy divergence particularly during a shortened workweek on Wall St to precipitate significant turbulence in asset prices and/or inefficiencies, yet valuations look fair in our view. This leaves us with an interesting question: where do we go from here?

Not surprisingly, the primary theme of the week has been trade. Tariffs on $34 billion of Chinese goods went into effect last night at 12:01 AM EDT. China has vowed to retaliate; Trump says he will raise the stakes. This doesn’t diminish other relevant datapoints, but an implicit trade war between the world’s largest economies that has now become a reality does play a role in shaping the investing climate and the outlook for global growth. The Fed did note the possibility of downside risks resulting from an escalation in trade tensions in its June minutes, while staying the course on rate hikes. Meanwhile, forward looking US economic data suggest continued expansion and the ECB (European Central Bank) is showing renewed confidence in its ability to end QE. The global growth story is unwinding a bit and that has meaningful ramifications, but for now, our numbers suggest that markets have fairly priced risk.

Market Outlook: Bullish USD, Neutral Duration, Neutral Equities