The major domestic equity indexes closed out the day on Thursday a bit lower in what was a bit of a volatile trading session due to escalating trade tensions and rising oil prices.

Comments by Trump that China “has become very spoiled on trade,” cast doubt on his efforts to avoid a tariff war between the world’s two largest economies, increasing investor jitters at the outset of a second round of high-level negotiations.

Unrest in the Middle East suggested a reduction of oil supply and sent crude prices to their highest level in three-and-a-half years. The S&P energy index was up 1.3 percent, making it the largest gainer of the major S&P 500 sectors.

Small-cap stocks fared better than their larger rivals. The Russell 2000 index closed at a record high for a second day in a row, while larger firms with more international exposure were pressured by rising oil prices and a strengthening dollar.

A Labor Department report indicated unemployment rolls dropping to their lowest level since 1973 and mid-Atlantic manufacturers asking higher prices for their products. The tightening labor market conditions and firming inflation bolster the likelihood of a Federal Reserve rate hike next month.

The 10-year Treasury ended the day at 3.1131 percent, maintaining its near seven-year high and pressuring rate-sensitive sectors as investors ponder whether bonds offer an attractive alternative to riskier equities.

Defensive stocks were among the worst performer among the 11 major sectors of the S&P 500. Rate-sensitive telecom, real estate and utility sectors were down in the face of rising government bond yields.

Cisco was the largest drag on the S&P 500 and the Nasdaq, falling 3.8 percent despite exceeding profit and revenue estimates in its post-market earnings report. In a research note, Citigroup said investor perception is that the technology company is losing market share.

The S&P 500 technology sector was down 0.5 percent.

Walmart lost 1.9 percent because of the company indicating that its earnings margins remained under pressure due to price cuts and higher freight costs even as sales and earnings came in stronger than expected.

Approximately 6.37 billion shares  changed hands on the major domestic equity exchanges, as compared to a 6.65 billion share average over the past 20 trading days.

Jobless Claims Rise

New applications for jobless benefits increased more than expected last week, but the number of Americans on unemployment rolls fell to its lowest level since 1973, pointing to diminishing labor market slack.

A report by the Labor Department on Thursday morning indicated that Initial claims for state unemployment benefits rose by 11,000 claims to a seasonally adjusted 222,000 claims for the week ended May 12. Claims data for the prior week was unrevised.

The labor market is viewed as being close to or at full employment, with the jobless rate near a 17-1/2-year low of 3.9 percent. The unemployment rate is within striking distance of the Fed’s forecast of 3.8 percent by the end of this year.

The four-week moving average of initial claims, viewed as a better measure of labor market trends as it irons out week-to-week volatility, fell by 2,750 claims to 213,250 claims last week, the lowest level since December 1969.

The claims data covered the survey period for the nonfarm payrolls portion of May’s employment report.

The four-week average of claims fell 18,250 between the April and May survey periods, suggesting solid job growth. Nonfarm payrolls increased by 164,000 jobs in April after rising by 135,000 in March. Job gains are slowing as companies struggle to find skilled workers.

There were a record 6.6 million unfilled jobs in March, according to government data published last week.

The claims report also showed the number of people receiving benefits after an initial week of aid declined by 87,000 to 1.71 million in the week ended May 5, the lowest level since December 1973. The four-week moving average of the so-called continuing claims rose by 39,750 to 1.77 million claims, also the lowest level since December 1973.

Declining continuing claims underscore tightening labor market conditions and support the proposition that wage growth will accelerate in the second half of the year.

Factory Activity Rises

The Philadelphia Fed said its manufacturing business outlook survey’s current general activity index rose about 11 points to a reading of 34.4 in May.

Manufacturers in the mid-Atlantic region reported hiring more workers this month. The survey’s employment index rose to a seven-month high.

A measure of prices paid by factories in the region fell, but the survey’s prices received index rose to its highest reading since February 1989.

The increase in factory activity in the mid-Atlantic region this month has manufacturers indicating that they are requesting higher prices for their products.

Asian Oil Thirst Is Expensive

Oil prices are poised to break through $80 per barrel and Asia’s demand is at a record high, pushing the cost of the region’s thirst for crude to $1 trillion this year, about twice what it was during the market lull of 2015/2016.

Oil prices have gained 20 percent since January to just shy of $80 per barrel, a level not seen since 2014.

With the dollar – in which virtually all oil is traded – growing stronger, concerns are rising that economies will take a hit, especially in import-reliant Asia. Surging costs could have an inflationary effect that will hurt both consumers and companies.

Asia-Pacific consumes more than 35 percent of the 100 million barrels of oil the world uses each day, according to industry data, with the region’s global share steadily rising.

Asia is also the world’s smallest oil producing region, accounting for less than 10 percent of output.

Diesel use contributes 10-20 percent to cash costs for miners, while oil contributes from 4 percent to 50 percent to the cost of power generation, depending on a company’s or country’s fuel mix. Therefore, a rising oil price therefore shifts the entire cost curve upward.

China is by far Asia’s – and the world’s – biggest importer of oil, ordering 9.6 million barrels per day in April. That’s almost 10 percent of global consumption. At current prices, this amounts to a Chinese oil import bill of $768 million per day, $23 billion per month – or $280 billion a year.

Other Asian countries are even more exposed to rising oil prices. Most damage will be done to countries like India and Vietnam, which not only rely heavily on imports, but also where national wealth is not yet large enough to absorb sudden increases in fuel costs.

Unless fuel is heavily subsidized, households and businesses in poorer countries are also more vulnerable to rising oil prices than they are in wealthier nations.

In developing economies like India, Vietnam or the Philippines, fuel costs eat up around 8-9 percent of an average person’s salary, according to Reuters research and figures from statistics portal Numbeo. That compares to just 1-2 percent in wealthy countries like Japan or Australia.

The surge in oil prices has a particularly big impact on transport and logistics companies. Some firms say they will pass on any higher costs to consumers. Others said if they burden consumers with higher costs, they will lose clients.

Nonetheless, given the economic costs and its reliance on imports, it is time for Asia to give consideration to limiting its exposure to oil.