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Week In Review


April nonfarm payrolls rose by 211,000 jobs. The unemployment rate fell to 4.4% from 4.5%. Average hourly earnings rose 0.3% in March, while aggregate hours worked rose 0.5%.

Our Take

April’s strong establishment survey report helps to offset the weakness in March, but averaging the two months shows tepid employment growth over the period. While March weakness may have been weather-related, it will take more than one strong report to establish an improving trend. The household survey is another matter. The Fed will likely look to the 4.4% unemployment rate as a definitive sign of tight labor markets. Hourly earnings are not supporting the tight labor market claim, as year-over-year earnings increases dropped from 2.6% to 2.5%. However, the Fed is likely to worry about inflation that may materialize with unemployment running at such a low level.


Following recent actions to reduce leverage and financial system risk by China’s banking, insurance, and securities regulators, the issuance of shadow-banking system products in April declined sharply. Chinese equity markets have declined and bond yields have risen as well in response to these deleveraging efforts. China’s recent economic reports have been strong, and the Chinese political leadership appears to be providing the impetus for the regulatory actions.

Our Take

Chinese regulators have recognized the need to reduce debt and financial system risk for several years, but the political leadership has been unwilling to accept the slower growth that would accompany this de-risking. This round of efforts may be more likely to stick because it is being driven by the political leadership rather than regulators. The real test will be the response of the politicians when deleveraging efforts begin to show up in economic growth data. Whatever decision the politicians make, China has been borrowing growth from the future for years now and the only question is how well the Chinese can manage the impacts of the necessary deleveraging.

FOMC Minutes

On Wednesday, the Federal Reserve Open Market Committee (FOMC) announced its decision to maintain the federal funds rate at the current target of 0.75% to 1%. According to the Fed statement, the committee expects the slow growth during the first quarter to be “transitory” and that economic activity will continue to expand at a moderate pace. Overall, labor market conditions have strengthened, with solid job growth and declining unemployment. Inflation has been running close to the committee’s target of 2%.

Our Take

There was no surprise to the Fed’s decision to hold rates steady. The Fed remains committed to “gradual adjustments” in the fed funds rate. Missing from the committee’s statement was any mention of a plan to deal with the central bank’s $4.5 trillion balance sheet. Rather, the statement reiterated the Fed’s current reinvestment strategy. Hopefully last month’s willingness to address the balance sheet does not prove to be short- lived.


Benchmark crude prices fell to the same level they were when the recent OPEC-Russia production cut deal was reached. The price slide is in response to the lack of effectiveness of the production cuts in reducing global inventories. Reduced crude output from OPEC and Russia has been replaced by increased U.S. shale output as crude prices recovered.

Our Take

U.S. shale producers have reduced their costs to the point that they are likely now the swing producers at around $45-50/barrel. This is now the price that major oil-exporting nations can sustain over the longer run. The lower price ceiling has potential geopolitical implications for nations that rely heavily on oil revenues to fund government spending.

ISM Indexes

The April ISM indexes were mixed. The manufacturing survey fell from 57.2 to 54.8, while the non-manufacturing survey rose to 57.5 from 55.2.

Our Take

Economists are expecting a strong rebound in economic activity during the second quarter. The ISM reports point to a mixed bag. Manufacturing sector weakness may be due to soft auto sales and the corresponding increase in inventories. The strength in the non-manufacturing survey is positive, as weak service consumption was a major component of poor GDP growth in Q1.


Puerto Rico filed for protection from its creditors as the commonwealth struggles with more than $70 billion in debt. This marks the first time a state or territory has asked for protection and will be the nation’s largest municipal bond restructuring. Governor Ricardo Rossello requested court relief under Title III of the PROMESA Act. In a statement issued on Wednesday, Governor Rossello indicated that Puerto Rico will continue to negotiate with its creditors during the court proceedings.

Our Take

While Puerto Rico is legally unable to use Chapter 9 bankruptcy, the PROMESA Act has Chapter 9 bankruptcy-like provisions. A federal judge will determine how the commonwealth’s debt will be restructured. Puerto Rico’s actions this week and the subsequent court proceedings may set a precedent for other financially troubled states and territories, such as Illinois and the Virgin Islands.