by Abraham Robison, Russell Investments
On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Research Analyst Brian Yadao discussed the recent U.S. jobs report, manufacturing indicators in China and the nuances of the recent yield curve inversion.
The U.S. jobs numbers was the top story this week, with 196,000 jobs added in the month of March, according to the Bureau of Labor Statistics. Robinson said: “A 196,000 jobs number is quite strong. 170 was the consensus and that’s already pretty strong and so this was a surprise to the upside. That means that our unemployment rate is going to be about 3.8%, which is a positive growth story for the U.S. economy.”
According to Robison, the effect of this that we are looking to see what the U.S. Federal Reserve (the Fed) might do in response to this sign of economic growth. “The Fed has already stated that they are going to be on pause,” said Robison. “They have the luxury of patience, as [U.S. Federal Reserve Chairman Jerome] Powell put it. With the inflation rate as low as it is, they can wait to see what happens with the economy.”
Manufacturing numbers point toward healthy growth
The U.S. not only had this good jobs number, but according to Robison, it also saw a strong manufacturing indicator this week as well. The Institute of Supply Management Manufacturing Business Survey released their latest findings on the first of April and the results featured slightly improved numbers. Robison said, “The particular component that we’re interested in is this new-orders component, which is a forward-looking number, and that means we can use it as a predictive variable in how the U.S. economy is going to move forward. And that came in quite strong.” Robison explained that the current number is an improvement over previous months’ reports, pointing toward a growth track for the U.S. economy.
The good news wasn’t limited to the U.S. Robison called out positive manufacturing data from China and mentioned how the Chinese government has “planned fiscal stimulus and changes to their monetary policy which should foster growth.” Robison also mentioned positive retail sales numbers in Europe.
The impact on markets
“Equities have had a very positive story,” said Robison, pointing toward the recent bull market. Robison also discussed the potential of a China-U.S. trade deal: “Any kind of deal will bring uncertainty to a close and that will release some pent-up business investment that has otherwise been put on hold. So that’s positive news for the equity markets.”
For the fixed-income markets, according to Robison, things have been a little more mixed, particularly in light of the recent yield curve activity. “We saw a yield curve inversion, and then an un-inversion. We’ve talked about how a yield curve inversion points toward a recession in probably six to 18 months, however we have to remember why that’s the case.” Robison explained that the yield curve is the difference between the 10-year treasury yield and the three-month treasury yield and that an inversion is often seen as a proxy for a potential move from an accommodative Fed policy to a more restrictive one.
But this yield-curve inversion seems to be playing a smaller role. “The Fed’s already said that they’re on pause,” said Robison. “They’ve already said that they’re going to wait for data to tell them what to do. So we don’t actually have to look at this indicator as a predictor for what their policy is going to be. We kind of know what their plan is, at least in the short-term. We don’t have to be as worried about this yield curve inversion as we normally would.”
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