Tarif risks are yet to materially hurt the US economy, according to the latest non-farm payrolls report. The US created 177k jobs for April, better than the 138k expected, Private sector payrolls were also stronger than expected, and at roughly the same rate as the downwardly revised figure for March, while the unemployment rate remained steady at 4.2%. The 3-month rolling average for payrolls was 155k, which is a healthy number considering the challenges facing the US economy since the start of this year.
The question now is, now that it looks like President Trump has blinked when it comes to reciprocal tariffs, has the US economy avoided the worst of the damage since the Liberation Day turmoil? The markets seem to think so, stocks are higher in Europe and in the US on Friday, the dollar is off the lows and US Treasury yields are surging, the 2-year and 10-year yields are both higher by more than 7 bps each. Even the oil price popped higher on Friday, although the price of oil remains subdued due to Opec + production increases scheduled for next month. Gold is also moving higher, as some of the deflationary concerns around tariffs are priced out of the market. The S&P 500 has now erased all of its losses since Liberation Day, and they have also retraced more than 50% of their losses since the peak on 19th February. The technical signals are pointing to a continued recovery rally for US stocks.
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Create account Try a demo Download mobile app Download mobile appIf US stocks can sustain gains on Friday, it would make it the longest uninterrupted winning streak since 2004! The last two weeks have seen a stunning comeback for US and European stocks. The S&P 500 is higher by 2.1% in the past week, while the Eurostoxx 50 is higher by 2.1% and the FTSE 100 by 2.15%. The market has been pricing out the prospect of US political risk from equities, as the news flow around tariffs remains positive. If this continues, then we may see stocks extend gains into next week.
Jobs growth defies the odds
The details of the NFP report were also solid. The leisure and hospitality sector posted decent jobs growth, which defies weakness in consumer confidence. The trade and transportation sector also created jobs last month, even though concerns mounted that Chinese containers to the US had slowed sharply.
The risk remains high that job growth could slow in the coming months, and May might not be as rosy for US employment. However, that risk does not take away from the fact that the US labour market has a strong base, which may be able to withstand future storms.
China takes a bite out of the Apple
Not all stocks are joining in the rally on Friday. Apple is lower after reporting disappointing results last night. The bulk of the disappointments are around the slowdown in sales to China, which is more of a structural issue about the AI features available in Chinese iPhones, than purely a tariff impact.
What this means for the Fed
This payrolls report has significance beyond the stock market rally. Next week the Fed will meet to decide interest rates. The stronger than expected labour market report has reduced already low odds that rates would be cut next week. There is now a 3% chance of a rate cut from the Fed next Wednesday. However, the odds of a rate cut in June have also fallen from 55% on Thursday to 40% today. The market had been expecting more than 4 rate cuts this year from the Fed this year, that has now been scaled back to 3.7 cuts in the aftermath of this payrolls report. It will be interesting to see how the Fed interprets this data, but they have said that they are data dependent, so we do not expect a dovish tone from Powell next week, which has the potential to ignite the ire of President Trump once again. For now, this payrolls report could boost the dollar, which has backed away from recent highs on Friday. We think that this is profit taking, since the dollar rose by more than 1.8% this week vs. the yen, and by 1.14% vs. the pound. We continue to think that the dollar recovery trade will extend into next week.
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