Letter To Shanghai No 1157 - The messaging is unlikely to be negative

Last Friday, we had the non-farm payroll data in which the US economy added 175,000 jobs in April, a deceleration compared to the upwardly revised 315,000 jobs added in March and significantly less than market expectations for a 243,000 increase. The missed expectations allowed the chatter of lower rates to be turned up a notch, but there seems to be some misapprehension if one looks at the details.? The average monthly new job gain for the preceding 12 months was 242,000 jobs. Therefore, if the April and March data points are taken together, they deliver an average of 245,000, which would indicate there is "nothing to see here" in terms of a slowing US economy. Indeed, we would need a few months of sub-200k jobs to convince ourselves the US economy is?indeed?slowing down.

In analyses that remove seasonal adjustments and deliver an 'actual' basis, employer payrolls rose by 803,000 to 158.0 million in April, a record high. On a household basis, data suggests a shift from self-employment back to company payrolls. Further, it would seem full-time jobs rose and part-time job levels shifted lower. Although qualitative data on employment is always somewhat sketchy and volatile, at the extreme, it can be argued that there are significantly more people employed in the US than the headline levels suggest, and that they have moved into full-time, higher-paying jobs and arguably more productive roles. This would?suggest?the struggle against US inflation is far from over and the return to sub-3% rates is wishful thinking.

This morning in China we saw the Caixin China General Services PMI which fell very slightly to 52.5 in April, down from 52.7 in March. As the data point was above 50 it was the 16th straight month of growth in services activity. And although the data is unspectacular, it continues to be solid. Perhaps in recognition, the Chinese stock markets are up around 15% from the February lows prior to the Chinese New Year.

As we have the 3rd Plenum in July, we might expect Beijing to deliver policies that will ameliorate issues of rising local government and real estate debt to support the economy, but maybe not. The economy is still delivering 5% growth, so maybe there is still room to do nothing.?More likely, Beijing will offer direct support for those companies on the front line of the intensifying trade war with the United States. Beijing may use the Plenum to lower regulations and open further to sidestep attempts to isolate China with the intention of establishing deeper roots in the Global South,?Asian and European markets.

Either way, we might expect the messaging is unlikely to be negative as Beijing attempts, for the moment, to talk the economy into a higher gear.?

Have a good day,

John