China Issues $50 Billion In Tariffs & Stocks Rally?!?

The stock market had a terrible morning because China announced $50 billion in tariffs per year which effect 106 U.S. products including soybeans, whiskey, cars, and chemicals. This 25% tariff comes on the heels of Trump’s list of Chinese imports which he wants to target to stop what he feels are unfair trade practices. It’s amazing how the market reacted to the tariffs because this would have been a massive disaster if this was announced 4 weeks ago. Stocks cratered last month on just $3 billion in tariffs issued by China. The uncertainty was how much greater the new tariffs were going to be because China said it was waiting for Trump to give specifics before announcing what they would retaliate with.

The Dow was down over 400 points in the pre-market trading and fell 436 points at the low on the day at 9:50 AM. From the morning until the close, stocks rallied as the Dow closed up 231 points. The S&P 500 was up 2.49% from the low on the day which was 2,580 at 9:35 AM. This was an important rally because it looked like the market was finally going to break through the lows of its range. The media had a confusing day. In the morning there were reports that the market had jitters about the trade actions and then the media reported that the market got over the worries after stocks went up.

It’s weird to report that the market changed its mind. Ultimately, I think this up move is a representation that the market understands these squabbles are the beginning of negotiations. It’s like if two parties say absurd prices at the start of negotiations. It seems as though the market considers these tariffs to be the worst case scenario, while the best case is none being enacted. Technically, the worst case would be an all-out trade war, but that’s no longer realistic. For some reason, it took the market a few weeks to understand that America and China need to work together; therefore, they won’t hurt each other. The pivotal change in market sentiment occurred when Trump used the steel and aluminum tariffs as an opening point for negotiations. These squabbles with China are all leading up to the point where Trump meets with Kim in the next month.

Great ADP Report

On Friday, the all-important jobs report is coming. The biggest number will be the wage growth as usual. The expectation is for 175,000 jobs created, with the range being 112,000 to 225,000. The unemployment rate is expected to fall to 4% and there is expected to be 175,000 in private sector jobs added. The ADP report, which was released Wednesday, showed 241,000 jobs added which means the ADP is more optimistic than the consensus. Furthermore, the cycle low jobless claims imply a high level of job growth. This ADP report is 5,000 below last month and marks an impressive stretch where private job creation has been between 241,000 and 249,000 for 4 straight months. As you can see from the chart below, improvement has come ever since the weak number in September which was caused by the hurricanes.

Because of the great ADP report and jobless claims, I expect the consensus to beat. I’m not expecting the result to match the 313,000 jobs created last month because that was unsustainable growth even if it is going to keep growing faster than the population growth. My estimate is for 200,000 jobs added. One other key point is the labor force participation rate is expected to fall 2 ticks to 62.8%. I expect the prime age labor force participation rate to continue to increase.

In the ADP report, the most jobs were added by midsized firms as 127,000 were added by them. 47,000 were added by small firms and 67,000 were added by large firms. Services added 176,000 jobs and goods-producing firms added 65,000 jobs. The information tech industry added 3,000 jobs which was the first time that industry added jobs since July 2017. I don’t think the ADP report caused stocks to rally, but it certainly didn’t hurt sentiment.

Atlanta Fed Model Is Now Bullish On Growth

The Atlanta Fed model had been bearish on GDP growth for the past couple weeks. It increased from 2.4% to 2.8% on April 2nd. This means all the regional Fed Nowcasts are more optimistic than the blue chip consensus. All the Nowcasts are also higher than the high-end range of the blue chip estimates you can see in the chart below. I’m in agreement with the blue-chip consensus because the latest reason the Atlanta Fed model pushed up its growth expectations because of the manufacturing ISM. The last time the model was based on the ISM data, it had GDP growth at 5.4%. You can’t base estimates on the ISM because it has been too optimistic for over a year.

On the bright side, the estimate was also improved because of the construction spending report. That’s interesting because the construction report missed estimates as it showed 0.1% month over month growth which was below the estimate for 0.5% growth. Growth was 3% year over year which was below last month’s growth rate of 3.2%. This is a continuation of a 2-year deceleration trend in growth. The Atlanta Fed may have modeled in a worse result. This may be how this report and the ISM report caused the privately fixed investment growth estimate to go up from 3.9% to 5.6%.

Conclusion

Stocks were up on Wednesday despite the tariffs. Usually, when the market goes up on bad news it’s a sign of a bottom. At the least, the negative implications of tariffs are priced in. The economic weakness can act as a negative catalyst in the next few weeks. The tech sell-off to me looks overdone based on the fundamentals. Facebook stock was down slightly as the firm expanded the number of people affected by the Cambridge Analytica scandal. Tesla stock has been up 13.65% as the negativity went overboard.