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A weaker than expected jobs report Friday morning and week-long fears of a trade war with China put investors on alert this week and added fuel to market volatility.

Equity markets moved back and forth through volatile trading days this week, remaining near positive territory for the week after a few wild swings. The Trump Administration and the Chinese government added to concerns with proposed higher tariffs that looks like the beginning of a trade war. Then on Friday investors were met with news that the U.S. economy only created about 103,000 jobs in March, missing expectations of 193,000.

The results have kept markets on edge. For mortgage professionals, the events are helping keep a lid on interest rates. The recent trend of rising rates has been largely fueled by a soaring equities market, bond yields rising, strong employment growth and fears that  inflation is around the corner. Those forces have prompted central bank officials to increase rates and scale down its balance sheet.

However, the trade-war volatility and slower jobs growth in March is keeping rates in their current range. The 10-Year U.S. Treasury yield, which is followed closely by 30-year mortgage rates, has been trading in a relatively tight range between 2.75 and 2.95 for a few weeks(see chart). Expect this to continue until we see some real direction from economic data. The 10-Year Treasury yield is currently 2.80%.

 

Keep a close eye on inflation data released later this month for our next significant reading on economic growth and indication of interest rate trends.

 More on jobs

Friday’s jobs number was viewed as an isolated disappointment as it fell well below Wall Street estimates. However, the prior month far exceeded expectations with 326,000 jobs created. Combined, February and March resulted in a two-month average of about 214,000 jobs created on U.S. private payrolls. This is in line with most expectations.

As a result, the low March number may be taken lightly if other indicators remain true. If inflation and future jobs numbers slide, then the Fed may take pause in its current trajectory. I don’t really expect this to happen.

The nationwide unemployment rate in March checked in at 4.1 percent, which is near full employment. In addition to the jobs number, average hourly earnings rose 0.3 percent month-over-month, beating estimates of 0.2 percent, and is up about 2.7 percent compared to March 2017.

Professional and business services led the way in job creation in March with 33,000 new jobs while manufacturing and health added 22,000 new jobs apiece, according to CNBC. Mining rose 9,000, while construction lost 15,000 positions and retail fell 4,000.

More on trade

On the trade-war front, President Trump made headlines on Thursday when he proposed additional tariffs on $100 billion worth of Chinese goods. In response, Chinese officials released statements saying they were prepared to fight back.

“We will immediately fight back with a major response,” a Ministry of Commerce representative said Friday in Beijing. “We feel America is very arrogant. They have taken a wrong action. The result is that they will hurt themselves. If they release the list of $100 billion tariffs, China is prepared.

“We won’t start a war, but if someone does, we will definitely fight back,” the representative said, saying the Trump administration was drawing a line in the sand between protectionism and globalism.

The war of words continued as Trump’s trade representative released a statement saying the “appropriate response from China should be to change its behavior… Unfortunately, China has chosen to respond thus far with threats to impose unjustified [retaliatory] tariffs… Under these circumstances, the President is right to ask for additional appropriate action to obtain the elimination of the unfair acts, policies, and practices identified.”

On Wall Street, the war of words has increased volatility as investors struggle to parse threats from actual policy shifts. Analysts at Goldman Sachs on Friday said they believe the jabs are “mainly a negotiating tactic, but raises the probability of additional market-disruptive announcements over the next few weeks.”

The Dow Jones Industrials fell about 200 points when it opened Friday as investors digested the war of words.

Overall, increased tariffs will take months to fully implement, perhaps longer if this new proposal of $100 billion additional tariffs becomes reality.

Analysts believe the U.S. has an upper hand in a tariff war with China because of the imbalance in what we import to the U.S. from China compared to our exports to their economy. However, China has other tools at its disposal, including the ability to devalue currencies or sell large numbers of US Treasuries it holds, which would both prove unpleasant to U.S. markets.

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About the Author:

Greg Richardson - EVP of Capital Markets

Greg Richardson is Movement's EVP of Capital Markets and a contributing author to the Movement Blog. His weekly market update is a must-read commentary on financial markets, the mortgage industry and interest rates. Greg is an industry veteran who knows how to read the financial tea leaves and make complex industry data easy for loan officers, real estate agents and homebuyers to understand.