U.S. steel and aluminum tariffs draw quick retaliation
Italian populist government finally set to take power
U.S. payrolls expected to recover after Mar/Apr weakness
ISM index expected to show continued strength in U.S. manufacturing confidence
U.S. steel and aluminum tariffs draw quick retaliation — The Trump administration on Thursday announced that the 25% tariff on steel and 10% tariff on aluminum will go into effect today on Europe, Mexico, and Canada. The announcement prompted immediate retaliation by Europe and Mexico. Canada said it would slap tariffs on $13 billion of U.S. goods with a list to follow later.
Europe has already prepared the list of $3.3 billion worth of U.S. products that will be hit with a retaliatory tariff. That product list includes some U.S. ag products, bourbon, clothes, metal products, boats, motorcycles, and many other items. Mexico on Thursday said that it would impose equivalent tariffs on various products such as flat steels, lamps, pork products, apples, grapes, blueberries, various cheeses, and others.
Meanwhile, Commerce Secretary Wilbur Ross and USTR Lighthizer are due to arrive in China on Saturday for a new round of trade talks. China is under more pressure for concessions after the Trump administration on Tuesday announced that final list will be announced on June 15 of $50 billion worth of Chinese products subject to a 25% tariff. Those tariffs will go into effect “shortly thereafter.”
If the U.S. goes ahead with its 25% tariff on $50 billion of Chinese goods, then China has promised to retaliate with an equal 25% tariff on $50 billion worth of U.S. products that China has already identified. At that point, President Trump may go ahead with his threat of tariffs on another $100 billion of Chinese products.
Italian populist government finally set to take power — The populist Five Star/League coalition is set to take power after appointing a little known economics professor, Giovanni Tria, as the finance minister. President Materrella approved the government since Mr. Tria is a less strident Euroskeptic and has not developed an actual euro exit plan, as did the coalition’s previous pick, Paolo Savona. The bad news, however, was that Mr. Savona will have a job in the new government as minister of European affairs where he may still create some waves.
The markets will now have to deal with Italy’s new populist government, which is likely to be a rocky road as they seek to boost spending, cut taxes, and change EU fiscal rules. However, coalition leaders perhaps learned a lesson about how the markets will react if they make any serious moves to leave the Eurozone. Coalition leaders will perhaps be a little more circumspect about their anti-euro comments once they take power and are fully responsible for any spike in Italian interest rates and plunge in Italian stocks.
Italian risk measures continued to ease on Thursday as the political situation stabilized. The Italian 10-year bond yield on Thursday fell by -11 bp to 2.77%, down by a total of -38 bp from Tuesday’s 4-year high of 3.15%. The 10-year Italy-German bond yield spread fell by -9 bp to 245 bp, which was 45 bp below Tuesday’s 3-3/4 year high of 290 bp. The iShares Italy stock ETF on Wednesday rallied by +0.71%, adding to Wednesday’s recovery of +4.34%.
Meanwhile in Spain, the opposition Socialists are reportedly very close to having enough votes to topple Prime Minister Rajoy’s minority government today with a no-confidence vote in parliament. That would usher in a new government led by the Socialists and supported by a handful of smaller parties. The Spanish-German 10-year yield spread on Thursday was little changed at 116 bp, which was -20 bp below Tuesday’s 1-year high of 136 bp.
U.S. payrolls expected to recover after Mar/Apr weakness — The market consensus is for today’s May payroll report to show an increase of +190,000, improving from weak reports of +135,000 in March and +164,000 in April. Today’s expectation for a payroll increase of +190,000 would exactly match the 12-month trend increase. In a cautionary note for today’s payroll report, Wednesday’s May ADP report of +178,000 was mildly weaker than market expectations of +190,000.
Meanwhile, today’s May unemployment rate is expected to be unchanged from April’s 18-year low of 3.9%. The FOMC is forecasting that the unemployment rate will drop farther to 3.8% by the end of this year and then to 3.6% in 2019-20. That would leave the unemployment rate well below the FOMC’s estimate of a natural long-term unemployment rate of 4.5%, indicating expectations for continued tightness in the U.S. labor market in coming years.
Despite the tight labor market, wage growth so far remains stable, which is a negative for consumer spending but positive for keeping inflation under wraps. The consensus is for today’s May average hourly earnings report to be unchanged from April’s +2.6% y/y, which would keep the measure 0.2 points below Jan’s 9-year high of +2.8% y/y.
ISM index expected to show continued strength in U.S. manufacturing confidence — The consensus is for today’s May ISM manufacturing index to show a +0.9 point increase to 58.2, recovering nearly half of April’s -2.0 point decline to 57.3. U.S. manufacturing confidence remains strong considering that April’s reading of 57.3 was only -3.5 points below Feb’s 14-year high of 60.8. The new orders sub-index has fallen for the past three reporting months but was still at the strong level of 61.2 in April, illustrating strong orders flow.
The markets will also be watching the ISM prices-paid sub-index, which illustrates the inflation flare-up in the manufacturing sector being caused by strong demand combined with high energy and commodity prices. The consensus is for today’s April prices-paid index to show a -1.3 point decline to 78.0 after May’s +1.2 point increase to a 7-year high of 79.3.