The Market Today

Italy Back to Negotiating Table; WH Pushes Forward with Tariffs on EU


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

Personal Spending Jumps in April, Income Benefits from Drop in Tax Payments; PCE Inflation Drops to 1.8% YoY: Today brings another full slate of economic data.  Personal income for the month of April rose 0.3% MoM, in-line with expectations although the March data were revised down from +0.3% to +0.2%.  However, tax and non-tax payments fell 0.5% MoM, likely the catch-up from March’s delayed tax refunds, helping disposable income rise a more-solid 0.4% MoM.  Also positive, personal spending rose an exceptional 0.6% MoM, highlighting a resurgence for the U.S. consumer.  After one month of data, real personal spending points to personal consumption growing 2.8% in 2Q.  With spending outpacing income gains, the savings rate dropped 0.2% MoM to 2.8%, the third lowest rate of this cycle.  Also released this morning, the April Core PCE report, the Fed’s preferred measure of inflation, rose 0.2% MoM as expected.  Previous revisions dropped the year-over-year rate from 1.9% to 1.8%, where it held in the April data.

 

Labor Data Continues to Paint Rosy Picture:  In the secondary data, the May Challenger Job Cuts report showed a 4.8% drop YoY in job cut announcements.  Thus far, the indicators for tomorrow’s May jobs report from the BLS appear solid.  Initial jobless claims for the week ending May 26 fell more-than-expected, from 234k to 221k.  Continuing claims, the number of people who have already filed for unemployment insurance and who are still receiving it, fell from 1.742 million to 1.726 million, the lowest level since 1973.

 

Pending Home Sales and Fedspeak Later Today: The April Pending Home Sales report, a leading indicator for the existing home sales report, is expected to show a 0.4% MoM increase.  Three Fed speakers are on the tape, including Bostic, Brainard, and Kaplan.

 

TRADING ACTIVITY

Overnight – Five Star, League Resume Talks in Hopes Second Attempt at Coalition Sticks: Asian markets played catch-up overnight, tracking Wednesday’s solid recovery in the U.S. and Europe as woes facing Italian assets abated further. China’s CSI 300 rose more than 2% to lead continent-wide gains. China’s outperformance was likely aided by the country’s PMIs topping expectations with the manufacturing index improving to its strongest level since September. European equities were stronger except for moderate losses in Germany. German automakers were near the bottom of the index after a local publication cited sources saying President Trump was considering keeping German luxury cars out of the U.S. The latest development in the Italian political saga further relieved pressure on the country’s assets. Italian President Mattarella was said to have given Five Star and the League another go at forming a coalition. The leaders of those two parties were meeting in Rome. Italian yields dropped with the 2-year yield down more than 40 bps. Complicating matters for European investors was the Eurozone’s estimate-beating May inflation report and a post-market report yesterday that the U.S. would allow tariffs on European steel and aluminum to take hold (more below). Headline inflation in the Eurozone rose from 1.2% to 1.9% YoY, the quickest in 13 months, while core moved up from 0.7% to 1.1%, its strongest since September. After this morning’s solid U.S. personal income and spending data and as-expected PCE inflation readings, equity futures and shorter Treasury yields were modestly higher.

 

Yesterday – Tuesday’s Setback was the Setup For Wednesday’s Comeback: U.S. markets took advantage of easing political tensions in Italy to recoup some of their losses from Tuesday’s sell-off. The Dow and S&P 500 both gained more than 1.2% as Italian equities led a widespread recovery across Europe. Italy’s FTSE MIB Index rebounded more than 2% as investors hoped the previous five days’ more-than-8-percent drop took things too far. The 2-year Treasury yield jumped 9.2 bps amid the global snapback as Italian government bonds recovered. The Italian 2-year yield fell from 2.70% to 1.59% amid waning political pressures. The 10-year Treasury yield rose more than 7 bps, from 2.78% to 2.86%, as the Italian 10-year yield dropped from 3.15% to 2.88%. The Dollar had its worst day since January as the Euro bounced back.

 

Trade Wars Back to the Fore:  The White House announced yesterday afternoon that it would proceed with implementing tariffs on imports steel and aluminum from the EU.  Fears of an escalating trade war subsided after the region was originally exempted from the tariffs.  However, citing poor progress in trade negotiations, the Administration decided to move forward with the tariffs.  EU leaders initially threatened to retaliate with tariffs on U.S. imports including motorcycles, bourbon, and jeans.  Also exempted were Canada and Mexico (among others).  With NAFTA negotiations making slow progress, those exemptions could potentially be rolled back also.  Interestingly, the markets have not whipsawed like they did when the steel and aluminum tariffs were originally announced, nor did they recoil when the Chinese tariffs were re-announced yesterday morning.

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