The US labor market report for April, published on Friday, surprised the markets with a noticeable deviation from forecasts.
The number of new jobs increased by 164 thousand, this is much less than forecasts, the unemployment rate has decreased from 4.1% to 3.9%, and this is a trough for more than 17 years. At the same time, wage growth slowed, experts expected +0.2% and an increase in annual rates to 2.7%, as a result, growth was only +0.1% and 2.6% respectively, not showing a positive trend relative to March.
Weak wage growth casts doubt on the rate of inflation, more so on the Wednesday meeting of the FOMC monetary policy, the FOMC slightly changed the wording on inflation expectations, making them tougher.
What is the result? A sharp growth in yields led to an increase in the dollar index, which under current conditions is clearly not in the hands of either the Fed or the Treasury. The inflation forecast until Friday was positive, the yields of 5-year bonds Tips have already reached the levels corresponding to August 2014, the growth of the dollar is natural, and even weak wage growth did not prevent it from consolidating by the end of the week.
On Friday, the talks between the US and China on trade ended without result. In fact, they could not be completed otherwise: the list of requirements for China included, among other things, the rejections of a subsidy program in advanced technologies adopted at the last congress of the CCP, reducing tariffs to convenient US levels, and providing guarantees that China would not respond on all disputes in the field of intellectual property. The requirements are absolutely impracticable, since it requires from China, no less, to revise plans for the development of the country.
Thus, the threat of the development of full-fledged trade war is not stopped and looks quite real, which means that the overall index of stress in the world economy will increase, which will be reflected in the demand for defensive assets, including the dollar.
Trump's protectionism looks like an attempt to "restart" the US economy, but there are serious doubts about it at this point. A small study of the Federal Reserve Bank of St. Louis came to the conclusion that the increase in tariffs leads to the opposite effect. During the period of 1980-2006, 16 episodes were identified, when tariffs increased by at least 3.5%, and what was received as a result?
First, the volume of imports decreases, the import/GDP ratio in the first 4 years after the growth of tariffs is reduced by an average of 2.5% per year.
And secondly, in the early years, the GDP per capita falls, the volume of investments to GDP, and most importantly - the annual salary deviates from the downward trend.
Thus, the growth of tariffs is usually followed by a prolonged decline in economic activity. Of course, Trump's team is familiar with such calculations, so its activity is directed to not only raise tariffs, but also to get compensation for losses from its trading partners.
It was precisely this task that was set before the delegation that held talks in Beijing, and it was this task that could not be solved. After all, in fact compensation for losses must be expressed in order to intensively finance the growing government debt. The Trump administration simply has no choice but to close the eyes of increasing holes in the budget in all possible ways. From their NATO allies, they are demanding to increase the military budget, that is, in effect, to provide a load to the US military-industrial complex, from China it is required, in addition to fulfilling a number of direct requirements, to increase the purchase of treasuries.
The counter question is China: what is its profit? Where are the concessions from the US? There is no answer to these simple questions, and as a result there is no progress in the negotiations.
The dollar finished the week with growth, and there is no reason to expect a change in trend. We should expect a resumption of growth in bond yields, the dollar will remain in proud solitude, as neither the Japanese yen nor the gold will be able to compete with it.