- US initial jobless claims fell to seven-year low, pointing to a strengthening labour market recovery
- While the Fed minutes were unmistakably dovish, they also contained some more hawkish elements
- More to the weak Chinese trade numbers than meets the eye
US initial jobless claims fall to seven-year low
Initial jobless claims fell by 32K to 300K in the week ending April 5, the lowest level since May 2007, and close to the historical lows that we saw during past upswings. This shows that the separation side of the labour market is turning healthy again, with firms firing fewer people. However, in order to get firmer job growth firms need to start hiring more aggressively. Indeed, this week’s JOLT survey showed that the hiring rate still needs to rise a lot in order to reach the highs seen during the previous upswing. This explains why in past recoveries initial jobless claims falling to around 300K were consistent with net job growth in excess of 300K, considerably more than gains in payrolls we are currently witnessing. Still, the drop in claims is in line with our view that the labour market recovery will gain traction in coming months.
Some hawkish signs in the Fed minutes
While March’s Fed minutes were unmistakably dovish, they also contained some hawkish elements that have not received a lot of attention. For a start, while meeting participants saw financial conditions generally as consistent with the Fed’s intentions, ‘several participants’ had noticed trends, that if continued, could become ‘a concern from the perspective of financial stability’. There was also an extensive discussion about the amount of available slack in the economy. Admittedly, several participants mentioned the low labour force participation rate, still-high rates of long-run unemployment, and the amount of workers employed part time for economic reasons as indicative of more labour market slack than suggested by the unemployment rate. But ‘a couple of other participants’ judged that the decline in the participation rate primarily reflected demographic trends with little role for cyclical factors, suggesting that slack was more limited. This view was reinforced by the Fed’s staff, who – because of downward surprises in the unemployment rate and weaker- GDP growth – slightly lowered its estimate of potential output.
Drop in China’s exports explained by exceptional factors
China’s exports in March were disappointing at -6.6% yoy coming up from -18.1%, but we think that this is partly explained by the export over-reporting that was going on in China in the first few months of last year, which has resulted in a high base year. Hong Kong is one of the countries that has been most affected by the controls of the over-invoicing. It’s average export growth was around 74% yoy in the first quarter of 2013 and March’s 2013 growth almost reached 93%. After the second quarter of 2013, administrative controls were enforced that reduced these distortions. On top of this, since February, China’s authorities accepted a two-way bet for the currency and it has been depreciating, making the over reporting even less attractive. Exports to Hong Kong plummeted in March (-43.6% yoy was -24.3% in February). Meanwhile export growth to the eurozone and the US improved to 8.8% from -14.4% and 1.2% from -11.3% respectively, confirming that trade to advanced economies is strengthening in line with the global recovery. We expect growth of exports to the US to pick more impressively after the effects of the strong winter dissipate.
Import slowdown more difficult to explain
Imports fell by 11.3% yoy in March coming down from 10.1% the previous month. The decline in import growth is to some extent explained by the weakness in domestic demand growth, but there is also some payback from high import growth in the previous month. Processing imports which are more related to production fell sharply. The weak growth in processing imports seems to be in line with a slowdown in domestic demand. Authorities have announced that they will support the economy through investments in railways and tax reliefs for small and medium enterprises. This should put the economy on firmer footing and increase import growth.