Markets continue to wait for U.S. military attack on Syria
Russian markets calm down a bit
U.S. consumer sentiment expected to settle back from March’s 14-year high
JOLTS U.S. job openings expected to fall back from Jan’s record high
Italian risk measures remain calm even with little progress on forming a government
Markets continue to wait for U.S. military attack on Syria — The markets are still waiting for the U.S. military attack on Syria that President Trump announced on Wednesday with his tweet that the missiles “are coming.” Mr. Trump on Thursday morning rolled back his timing by tweeting that, “Never said when an attack on Syria would take place. Could be very soon or not soon at all.”
The markets took that tweet as a positive sign that the decision is taking more time so that the U.S. can get France and the UK on board and carefully plan the targeting so that it doesn’t draw any counter-attacks from Russia and/or Iran. The markets at this point will take it as a positive if the attack is short in duration (e.g., a day or two) and if no Russian or Iranian assets or military personnel are hit.
Russian markets calm down a bit — The Russian markets this week have been roiled by the combination of last week’s U.S. sanctions on Russian oligarchs and their companies and this week’s exchange of threats between the U.S. and Russia over Syria. President Trump on Wednesday morning tweeted to warn Russia that the missiles are coming after a Russian official said that Russia could shoot down the U.S. missiles or attack the source of the missiles, i.e., American ships and submarines in the Mediterranean.
The Russian ruble on Thursday rose by +0.7% and added to Wed’s recovery of +1.0%, but is still down by -6.7% on the week. The MOEX Russian stock index on Thursday rose by +0.8% and extended the 3-session recovery due to higher oil prices, but is still down -3.1% on the week. The 10-year Russian government bond yield on Thursday fell by -10 bp to 4.42% but is still up by +36 bp on the week. The Russian 5-year credit default swap, the cost of insuring against a Russian sovereign debt default, fell by -7 bp to 143 on Thursday, but is still up by +22 bp on the week.
U.S. consumer sentiment expected to settle back from March’s 14-year high — The consensus is for today’s preliminary-April University of Michigan U.S. consumer sentiment index to fall by -0.9 points to 100.5, giving back about one-half of March’s +1.7 point gain to the 14-year high of 101.4.
U.S. consumer sentiment remains very strong in general due to (1) the strong labor market and rising consumer income, (2) rising home prices that are boosting household wealth, and (3) the Jan 1 personal tax cuts that gave most people higher after-tax income. Negative factors include (1) the U.S. stock market correction, (2) Washington political uncertainty, (3) trade and geopolitical tensions, and (4) the recent rise in gasoline prices.
JOLTS U.S. job openings expected to fall back from Jan’s record high — The consensus is for today’s Feb JOLTS job openings report to show a decline of -247,000 to 6.065 million, giving back a portion of January’s +645,000 surge to a record high of 6.312 million. The record high in job openings in January was a positive leading indicator for the payroll series since many job openings will eventually turn into a new hire. Indeed, Feb payrolls rose sharply by +326,000 but were then weak at +103,000 in March. The payroll weakness in March was attributed largely to bad weather and payback after Feb’s strength.
The markets expect the U.S. labor market to remain strong in coming months, causing the U.S. unemployment rate to continue falling. The Fed is expecting the U.S. unemployment rate to fall from its current 17-year low of 4.1% to 3.8% by then end of this year and then to 3.6% by the end of next year.
Italian risk measures remain calm even with little progress on forming a government — The Italian financial markets remain relatively unconcerned about the difficult time that Italy’s political parties are having in forming a new government. The premium of the Italian 10-year bond yield over the German bund yield is currently at 130 bp, which is near the middle of the Feb-April range and is only 10 bp above Feb’s 1-1/2 year low of 120 bp.
Italy’s President Mattarella today is expected to hold his second day of talks with the political parties in his second round of talks on forming a government. Last week’s first round of talks showed no progress. The situation has deteriorated in the past week and the prospects appear grim for any sort of break though. Italy’s Democratic Party, which was drubbed in the election, is still refusing to partner with anyone to form a government coalition and say they will be in opposition. That leaves only the Five Star party and the center-right coalition parties to figure out if they can form a government.
Five Star is willing to discuss a partnership with the far-right League if the League would exclude its coalition partner, Berlusconi’s Forza Italia party. However, the League has so far been unwilling to dump Forza Italia, leading to the current stalemate. The markets would not be happy with a populist Five Star/League government, but such a government would be more palatable if it included the establishment Forza Italia party to slow down any extreme ideas.
Talks are likely to continue for a matter of weeks. If there is no prospect for a solution, then Italian voters will have to go back to the polls. However, there is no assurance that new elections would shift the vote percentages among the parties by enough to change the current impasse.