Friday's jobs report for April handily beat expectations; the Fed's assessment of low inflation as "transitory" surprised markets; prices for pork and feedstocks could be rocked by a massive outbreak of African swine fever in China.
“There’s good reason to think that these low [inflation] readings are particularly influenced by some transitory factors”
U.S. Jobs: Payday
Friday's Jobs report for April handily beat expectations. Nonfarm payrolls grew by 263,000 and the unemployment rate fell to 3.6%, adding to the week's string of strong economic figures, which included the ADP employment report for April, the 3.6% non-farm productivity figure and the decline in unit labor costs for Q1. The week's figures were also broadly in line with the better-than-expected 3.2% GDP for Q1, reported the week before.
Financial market reaction was mild, with yields1 for the 2-year and 10-year Treasury virtually unchanged at 2.339% and 2.539% respectively. The U.S. dollar rose slightly against a basket of other currencies, with the Dollar Index continuing its upward move since the May 1 FOMC decision, rising just under 1% since the beginning of the post-meeting press conference.
The Fed: "transitory factors"
The stubbornly low 1.6% core PCE inflation figure for March and associated statements of concern from Fed governors could be seen as signals the FOMC might be inclined to cut, rather than raise, its target rate for Fed Funds.
But Fed Chair Jerome Powell's statement and press conference on Wednesday took a different tack, surprising more than a few observers and market participants. Instead of following through on previous hints about the need to boost inflation by possibly lowering rates, Mr. Powell characterized the forces keeping inflation low as "transitory", not requiring any change in policy direction by the FOMC.
Financial market reaction reflected the slight change in direction, with the futures market for Fed Funds showing the probability of a rate cut at the June 19th meeting falling back to less than 10% from its end-of-March figure of nearly 33%.
China commodities: Hog-tied
China is home to over 440 million swine, half the world's population -- so the rapid spread of "African swine fever" from farms in Shenyang represents cause for concern in commodities markets worldwide. Chinese officials estimate that 1 million hogs have already been culled to control the spread of the disease, which appears not to be contagious for humans. But that is a small fraction of the estimates of what might ultimately be required, which could be as high as nearly 25% of China's existing stock. The U.S. Department of Agriculture's April forecast expects a decline in China's herd of about 134 million, equivalent to the entire annual U.S. output of pigs.
Chinese official data show a slowdown in the number of pigs affected since late 2018, supporting the government’s assessment that the disease is “under effective control.” Even so, the impact will clearly ripple through the world's trade in hog-related commodities, as well as beef-related commodities such as feedstocks in ways not yet entirely clear.
 Source: Bloomberg, May 3, 2019, 9:15 AM ET.
The ADP National Employment Report provides a monthly snapshot of U.S. nonfarm private sector employment based on actual transactional payroll data.
ADP is a comprehensive global provider of cloud-based Human Capital Management (HCM) solutions that unite HR, payroll, talent, time, tax and benefits administration, and a leader in business outsourcing services, analytics and compliance expertise. The ADP Research Institute works in close collaboration with Moody's Analytics and its experienced team of labor market researchers to publish monthly employment reports.
The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System (Fed), which is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Personal Consumption Expenditures (PCE) Price Index is a measure of price changes in consumer goods and services; the measure includes data pertaining to durables, non-durables and services. This index takes consumers' changing consumption due to prices into account, whereas the Consumer Price Index uses a fixed basket of goods with weightings that do not change over time. Core PCE excludes food & energy prices.
The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.