The Market Today
New Italian P.M. Lauds Old Themes: Earlier Retirement, Increased Spending, Fairer E.U.
by Craig Dismuke, Dudley Carter
Job Openings and ISM Manufacturing Report Likely to Add to Evidence of Economic Tailwinds: At 9:00 a.m. CT, the JOLTs Job Openings and Labor Turnover report is expected to show job openings pull back from their highest level on record, 6.55 million. Almost every measure of labor slack points to an unusually tight labor market, despite there being little evidence in wage growth. As an example, there were 6.06 million unemployed persons looking for work according to the May BLS data. There were 6.55 million job openings according to the March JOLTs data (see Chart of the Day). Also at 9:00 a.m., the ISM Non-Manufacturing index is expected to rise 0.8 points to 57.6 after falling 2 points in the April report.
Yesterday – Tech and Consumer Companies Lifted Stocks, Treasury Yields: Treasury yields rose Monday and the Dollar weakened as U.S. stocks started the week off on the right foot. The S&P 500 registered back-to-back gains for the first time since May 14 to reach its highest level since March 16. The daily improvement was preceded by strength in overnight futures trading amid a solid day for equities globally. Last Friday’s stronger-than-expected payroll report seemed to give global growth sentiment a spark again on Monday. Consumer shares moved up the most, rallying more than 1%, while energy shares served as the biggest drag. Oil prices dropped more than 1% and U.S. WTI closed at an eight-week low on growing expectations that OPEC will increase supply. Tech companies also strengthened within the S&P and helped push the Nasdaq up 0.7% and to its first record finish since March 12. As equities strengthened, Treasury prices moved lower, pushing the yield curve up in nearly parallel fashion. The 2-year yield rose 4.5 bps to 2.52% while the 10-year yield added 4.0 bps to 2.94%. The spread between the two inched down to a new cycle-low of 42.2 bps.
Overnight – Treasury Yields Fall as Italian Assets Soften During New PM Speech: Global equities generally improved overnight while core sovereign yields ticked lower, giving back some of Monday’s increase. After uneventful trading in Asia, European equities picked up the pace and Germany’s DAX was leading gains across mainland Europe. The 1.1% rise for the German index has helped push the Stoxx Europe 600 0.5% higher. Italy’s FTSE MIB was up 0.3% but lagging other nations. Italian bonds were also the worst sovereign performers. The 2-year Italian yield rose roughly 20 bps with the 10-year yield 18 bps higher. Those moves were made during a speech by the newly-named Prime Minister ahead of a vote of confidence in the Senate. PM Conte said social rights would be at the center off the coalition’s agenda, pointing to citizen’s income, increased health spending, earlier retirement, and a two-tiered flat tax, among other items. On Italy’s ties to the EU, Conte said “Europe is our home, the home of everyone. We must push for a stronger and fairer Europe,” but also noted the bloc’s immigration policy had failed. Treasurys strengthened with German Bunds, with the U.S. 2-year yield down 3.2 bps to 2.48% and the 10-year yield 3.8 bps lower at 2.90%, forcing the curve flatter and past yesterday’s cycle-low closing spread.
No Excitement in April’s Factory Orders Data: April’s Factory Orders report was rather dull. A current month miss was partially offset by a positive prior month revision and the underlying details on durables and business spending were essentially in line with initial estimates. Transportation orders were a drag at the headline level. Stripping out that negative activity, factory orders were up 0.4% from March. Core durable goods orders and non-defense, non-aircraft capital goods orders were unchanged in revisions from their initial better-than-expected estimates of +0.9% and +1.0%, respectively. Shipments of core capital goods in April were revised marginally higher from up 0.8% to up 0.9%.
ICYMI – May 2018 Monthly Review: Equities leveraged early gains to notch a second monthly improvement despite market-moving political drama in Italy and a return of trade tensions later in the month. The on-again, off-again, on-again formation of a populist coalition government in Italy briefly roiled global assets before a round of announcements regarding tariffs revived fears of a global trade war. The U.S. said it would move forward with tariffs on Chinese imports and steel and aluminum brought in from the EU, Canada, and Mexico. Still, the S&P 500 rose 2.2% in its best month since January. While equities weathered the turmoil in Italy and a return of tariffs talk, the effect on Treasurys was longer-lasting. After setting multi-year highs across the curve, yields pulled back notably. The 2-year ended the month at 2.43% after climbing as high as 2.60%. The 10-year finished at 2.86% after it touched 3.13% earlier in the month. Click here to view the full recap.
Chinese Steel Tariffs Face Free Global market Challenge (WSJ): Over the past few years, China’s government has been investing through state-owned lenders and funds in companies producing steel outside of the country to avoid tariffs from Western countries. According to the WSJ, “By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.”