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US: Labour market resilience amid sticky inflation to constrain a Warsh-led Fed’s easing cycle. After flip-flopping for several months, US nonfarm payrolls (NFP) finally registered two consecutive months of gains. April’s NFP hit 115k (vs a consensus of 65k), while the net negative revision was modest at 16k. Private payrolls were particularly robust, coming in at 123k. We note that job gains were broad-based, helping to keep the unemployment rate steady at 4.3%. The upshot is that the US labour market has not been materially affected by the Middle East conflict.
US inflation data for April surprised to the upside. Headline CPI rose 0.6% m/m, with annual inflation accelerating to 3.8% y/y in April from 3.3% y/y in March. Core CPI likewise came in above market expectations, rising 0.4% m/m. Importantly, the acceleration was not solely driven by food and energy prices, but reflected broader underlying price pressures, including core services. Meanwhile, AI-related supply bottlenecks have continued to push IT goods prices sharply higher. Rental costs are still rising, though part of the increase appears to reflect a one-off adjustment linked to anomalous data omitted during the October government shutdown. Against this backdrop, inflation expectations have continued to reprice higher. The 1Y breakeven inflation rate has rebounded from 2.98% last week to 3.23%, which is likely to constrain the easing cycle under the Warsh-led Fed.
Meanwhile, amid various trade deals and exemptions, US tariff collections have been ebbing since last October. Following the February Supreme Court ruling invalidating tariffs imposed under the International Emergency Economic Powers Act, and the May court ruling declaring section 122 tariffs illegal, customs duty collections are likely to decline further in the coming months. Expectations that tariffs could generate at least 1% of GDP in revenues to support the US fiscal position will need to be scaled back. These developments would add further pressure on the budget deficit.
The focal point for a shift in sentiment will be the Trump-Xi Summit in China on 14-15 May. The Centre for Strategic & International Studies has framed the agenda as the US’s “Five Bs” (Boeing, beef, beans, Board of Trade, and Board of Investment) vs China’s “Three Ts” (Taiwan, tariffs, and technology). Markets are looking for more than just rhetoric. Investors want a concrete mechanism to manage trade relations and limit further tariff escalations, an easing of US semiconductor export curbs, and a loosening of China’s grip on rare earth shipments. Ultimately, the prize is a joint diplomatic signal that provides an “off-ramp” for the Iran conflict, as reopening the Strait of Hormuz could finally set crude oil prices on a sustainable path below USD100/bbI.
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