Strong U.S. Data Bests China

Markets rebounded this week, boosted by strong corporate earnings results from Starbucks, Molson Coors, and DowDuPont. Also giving the Dow a shot in the arm was news the U.S would resume trade talks with China later this month at the G-20 summit in Argentina. On the economic front, we saw strong reports on nonfarm payrolls and manufacturing, providing further support of healthy U.S. economic momentum. In international news, China released figures on manufacturing which showed factories struggled to expand in October as the U.S.-China trade war drags on. With investors feeling optimistic on the economy, corporate earnings, and trade, the Dow added 2.36% for the week.

Job Growth Surges in October

The U.S. economy added 250,000 jobs to the payrolls in October, up from a downwardly revised 118,000 jobs added in September. Meanwhile, the unemployment rate held steady at 3.70%. Job growth was broad-based with education and healthcare +44,000, professional and businesses services +35,000, manufacturing +32,000, construction +30,000, transportation and warehousing +24,800. The much-followed wage growth number posted a 3.10% year-over-year gain, its fastest increase in nearly a decade. The month’s jump in wages shouldn’t prompt concerns of a broad jump in inflation that would prompt more aggressive Fed tightening, however. The year-over-year numbers are clouded by last year’s Hurricane Harvey which lead to an unusual drop in wages in October last year. The storm prompted lower-paid workers to drop off the payrolls, leading to a drop in wages a year ago. With workers back on the job, those wage losses have now reversed. Excluding October’s wage gains, workers have seen a modest boost in their paychecks, with wage growth up an average of 2.70% this year. The strong jobs market, combined with robust wage growth, is expected to keep the Fed on track to hike interest rates next month.

U.S. Manufacturing Continues to Expand

Despite the on-going trade war with China, U.S. manufacturing continued to expand in October. The Institute for Supply Management Index registered 57.7, down slightly from September’s 59.8. Despite the drop, manufacturing remains well above 50 which indicates expansion in the manufacturing sector, while numbers below 50 indicate contraction. New orders remained moderately strong but did manage to slip to 57.4 in October from 61.8 in September. Employment in manufacturing continued to expand, dipping slightly to 56.8 in October from 58.8 the prior month. The most notable weakness was in new export orders which fell from 56.8 in September to 52.2 in October as U.S. exporters became subject to retaliatory tariffs. While the export component was weak, U.S. manufacturing more generally has held up fairly well, supported by robust domestic demand.

Chinese Factory Floors Struggle

It was another tough month for Chinese manufacturers, with China’s Official Manufacturing Purchasing Managers’ Index (PMI), which focuses on large companies and state-owned enterprises, falling to 50.2 in October, down from 50.8 in September. The reading shows the manufacturing sector barely expanded in October as U.S. tariffs continued to take their toll. New export orders contracted for the fifth straight month as the latest round of U.S. tariffs went into effect. Meanwhile, the private survey by Caixin & IHS Markit, which focuses on small and medium-sized businesses, posted similar results. The index ticked up slightly to 50.1 in October, up from September’s 50.0. The sub-index for new orders rose slightly to 50.4 from 50.1 in September. Meanwhile, new export orders, which are an indicator for future activity, continued to contract, registering 48.8 in October, a slight improvement from September’s 47.6 reading in September. The PMI reading shows that U.S. tariffs along with otherwise lackluster global growth are having a bruising impact on China.

Strong corporate earnings reports, healthy jobs and manufacturing numbers, and optimism for a China trade deal combined to turn investor sentiment positive this week. Markets grew more optimistic on a China trade deal on Thursday as initial reports signaled a more formal trade plan may be in the works. Unfortunately, the optimism proved unfounded when on Friday the White House clarified that trade talks could not resume until Beijing outlines specifics on how it intends to comply with U.S. demands. The news prompted traders to take gains off the table after an otherwise strong week. As we’ve seen in recent weeks, China remains a big driver of investor sentiment as the U.S.-China trade dispute grinds on. Nevertheless, the U.S. economy continues to hum along with companies remaining confident enough on the business outlook that they continue to add to their payrolls and businesses continue to see healthy customer demand. The next big test for the market comes next week at the Federal Reserve holds its Federal Open Market Committee (FOMC) meeting. Interest rates have been the other driver of sentiment for investors and, while a hike is not expected this go-round, traders will be parsing the Fed’s statement carefully.

The Week Ahead