The Market Today
Yields Respond to Italy, Look Through Tariff-Talk and Very Strong Economic Data
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Quiet Week with Focus on GeoPop Headlines: This week’s calendar is much more quiet than last week’s when we saw strong data from reports covering business investment, home prices, construction spending, consumption, personal income, consumer confidence, manufacturing, and job gains. In fact, the only sign of weakness was another drop in auto sales – which should be expected given the trend over the past year. As for this week, the important reports to watch include Tuesday’s ISM Non-Manufacturing Index and JOLTs Job Openings data, the April Trade Balance on Wednesday, and Wholesale Inventories on Friday. Additionally, G-7 leaders will meet in Quebec later this week with many of those leaders upset with President Trump.
Yields Respond to Italy, Seem to Shake off Tariff-Talk and Very Strong Economic Data: Interestingly, we learned a few things last week as it relates to the markets. Despite the unusually good economic data, the 10-year yield fell 3 bps on the week to close at 2.90%. On Tuesday, however, the 10-year yield saw its largest, single-day decline since Brexit, down 15 bps after the Italian government fell into disarray (more below). By the end of the week, the acute risks were mostly mollified (the longer-run risks still persist for another day). Also last week, the White House escalated the trade skirmish once again. Spain’s Prime Minister had also received a vote of no confidence. On a positive note, the President announced that the meeting with North Korea is now back on. Perhaps it was the exceptional economic data, but it appears that the markets are just looking through some of the geopolitical events at this point. Recall that the last time tariffs were announced as possibilities on steel and aluminum imports, the markets convulsed. This time, they barely responded. Perhaps investors believe dictums from the Administration should be treated with less reverence than they have been historically.
Overnight – Stronger Start Compared with Last Week’s Opening Slump: There has been an entirely different tone to the start of this week’s trading compared to the tumult that tanked global sentiment early last week (more below). Global equities were stronger overnight following Friday’s payroll-driven gains in the U.S. and despite last week’s talks of tariffs carrying over into a weekend meeting of G-7 finance officials. Equities moved up across Asia and the Stoxx Europe 600 was 0.5% higher. U.S. equity futures were also firmer signaling a continuation of the positive Friday momentum that salvaged a weekly gain for the S&P 500 and significantly trimmed the Dow’s weekly decline. A strong-across-the-board nonfarm payroll report boosted investor confidence and ended a rough week of global trading on a high note (more below). Also helping the mood were Italian bond yields dropping to their lowest level since before last week’s politically-driven mayhem roiled global markets. Treasury yields were higher with the 2-year yield adding 1.2 bps to 2.48%. The 10-year yield was unchanged at 2.90%. The net effect was a new cycle low of 41.6 bps for the spread between those two securities.
ICYMI – June 1, 2018 Weekly Market Recap: Last week ended better than it began as markets’ fears around the state of Italian politics gave way to cheer about a nearly unblemished U.S. nonfarm payroll reports. After reopening from the Memorial Day holiday break, Treasury yields fell the most on Tuesday since Brexit after an apparent unraveling of a coalition government in Italy. The developments ratcheted up the pressure on Italian assets and roiled markets around the globe. By Thursday, markets had recovered somewhat ahead of news that the coalition was back on and had received the blessing of Italy’s President. That allowed Friday’s focus to be centered on May’s surprisingly strong nonfarm payroll report in the U.S.. Payrolls grew by 223k, the unemployment rate of 3.8% matched its lowest level in almost half a century, other measures of underemployment touched new cycle-lows, and earnings grew 0.3% MoM which pushed the YoY rate up to 2.7%. Between those two big bookend events, trade tensions re-emerged. The U.S. said it was moving forward with tariffs on $50B of Chinese imports and allowing tariff exemptions on steel and aluminum for the EU, Canada, and Mexico to lapse. That drew criticism and calls for retaliation from all affected counterparties. Click here to see the full recap.