Yellen Returns from China with New Channel of Communication

Treasury Secretary Janet Yellen’s visit to Beijing is being hailed as a “success.” As both sides seek to limit the negative impact to their respective economies, Yellen’s 10 hours of meetings – over Friday and Saturday – reportedly resulted in establishing the need for guidelines or “guardrails” in the intensifying competition, at least from an economic standpoint, as opposed to military. Heading to China just weeks after Secretary of State Antony Blinken made his own visit to Beijing, according to reports, Yellen aimed to convince leaders that the U.S. isn’t intent on achieving “economic advantage,” but rather protect national security.

Ahead of the trip, Chinese President Xi Jinping said he sought to “reject the moves of setting up barriers, decoupling, and severing supply chains." "We should make the pie of win-win cooperation bigger,” he added, and “ensure that more development gains will be shared more fairly by people across the world.” “While no one visit will solve our challenges overnight,” Yellen responded in the aftermath of the meeting, “I do expect this trip will help build a resilient and productive channel of communication with China’s new economic team.”

Yellen’s trip comes as China and the U.S. intensify what has been deemed a “tech feud.” As recently as last week, China unveiled a set of national security restrictions placing limitations and controls on key metal exports, such as gallium and germanium, used in semiconductors, electric vehicles and aerospace manufacturing. While such measures are likely to exacerbate still delicate global supply lines, the country said such “countermeasures” are necessary in response to U.S. action. Recall in August 2022, the Biden administration introduced the Chips Act, and later in October, enacted export controls to prohibit American firms from “selling chip designs, software and equipment to Beijing.”

On the economic calendar front, on Friday, nonfarm payrolls rose by 209k in June, less than the 230k gain expected according to Bloomberg and the weakest pace of job creation since December 2020.

June payrolls, meanwhile, were revised lower from a 339k gain to a 306k increase. With additional revisions to previous months, the overall change in nonfarm payrolls (June data + net revisions) was just 99k.

In the details of the report, private payrolls rose by 149k in June following a 259k gain in May. Goods-producing payrolls rose by 29k due to a 23k rise in construction payrolls. Manufacturing payrolls, meanwhile, rose 7k in June following a 3k decline the month prior. Private service producing payrolls rose by 120k in June, down from a 236k gain in May. Education and health payrolls led the gain in service payrolls in June, rising 73k following an 80k rise the month prior. Professional and business services payrolls rose 21k, despite a 13k decline in temporary help payrolls. Also, leisure and hospitality payrolls rose 21k, and financial payrolls rose 10k. On the other hand, information payrolls were flat, while trade and transport payrolls declined 22k, due to an 11k fall in retail trade payrolls. Additionally, government payrolls rose by 60k in June following a 47k gain in May.

Household employment rose by 273k in June following a 310k decline the month prior. The labor force, meanwhile, rose by 133k following a 130k rise in May. Thus, the unemployment rate fell a tenth of a percentage point from 3.7% to 3.6% in June, as expected and a two-month low.

The labor force participation rate, meanwhile, remained at 62.6% in June for the fourth consecutive month, as expected and the highest since March 2020. At 62.6%, however, the participation rate is still below the pre-pandemic rate of 63.3%.

Also, average hourly earnings rose 0.4% in June, a tenth of a percentage point more than expected and following a 0.4% increase in May. Year-over-year, wages rose 4.4% for the third consecutive month.

Finally, the average workweek ticked up from 34.3 to 34.4 hours in June, a two-month high.

Bottom Line: A disappointing headline read relative to expectations. In fact, given earlier revisions, the net gain (99k) fell short of 100k for the first time since December 2020 (when the economy lost 268k jobs). Nevertheless, job creation remains positive and for the Fed, the headline number is far less important than the underlying components: a decline in the unemployment rate, an increase in wage growth, this is this exact opposite of what policy makers have been looking for – had hoped for. This lack of improvement in wage inflation specifically will keep the Committee on target for another rate hike later this month. If anything, June’s mixed employment report or slightly cooler jobs number eliminates rising pressure on the Fed to perhaps reengage at a more robust pace had there been an upside surprise on all fronts.

With the clock ticking down, this week’s CPI and PPI reports will act as the last key data points before the July policy announcement. As the June minutes showed, Fed officials are increasingly concerned regarding the sluggish pace of improvement in inflation. Down from peak levels, inflation remains more than double the Fed’s intended target. While one month may not be enough to move the needle in either direction, an upside surprise will more than solidify a hike in July and potentially a secondround post-pause hike come September.

According to Bloomberg data, the CPI is expected to rise 0.3% and 3.1% year over year, down from a 4.0% pace reported the month prior. The PPI is expected to increase 0.2% in June and rise just 0.4% over the past 12 months, down from the 1.1% gain in May and marking the slowest pace of annual producer price growth since September 2020.

Excluding food and energy, the core CPI is expected to rise 0.3% in June and 5.0% over the past 12 months, down from the 5.3% gain in May. The core PPI is expected to increase 0.2% in June and rise 2.5% year-over-year following a 2.8% increase in May.

Tomorrow, the NFIB Small Business Optimism Index is expected to rise slightly from 89.4 to 89.8 in June, a three-month high.

-Lindsey Piegza, Ph.D., Chief Economist