Trade tensions and Italian politics continue as threats even as U.S. and European stocks partially recover
Trade tensions are running high as WSJ says U.S. will slap steel-aluminum tariffs on Europe
U.S. PCE deflator expected to remain firm
Unemployment claims expected to remain favorable
Weekly EIA report
Tuesday’s panic moves. The Italian 10-year bond yield on Wednesday fell by -27 bp to 2.88% from Tuesday’s 4-year high of 3.15%. The 10-year Italy-German bond yield spread fell by -36 tp to 254 bp from Tuesday’s 3-3/4 year high of 290 bp. The 5-year Italian credit default swap, which is the cost of insuring against an Italian sovereign bond default, fell by -15 bp to 254 bp from Tuesday’s 4-3/4 year high of 269 bp. The iShares Italy stock ETF on Wednesday rallied by +4.3%, recovering most of Tuesday’s -5.8% plunge to an 11-month low.
Meanwhile, political uncertainty is running high in Spain as opposition forces are reportedly close to having enough votes to topple Prime Minister Rajoy’s minority government with a no-confidence vote on Friday. If the no-confidence votes are there, Mr. Rajoy may decide to instead resign as soon as today. The Spanish-German 10-year yield spread on Wednesday fell by -20 bp to 116 bp from Tuesday’s 1-year high of 136 bp.
Trade tensions are running high as WSJ says U.S. will slap steel-aluminum tariffs on Europe — Trade tensions are almost as much of a problem for the markets as Italy. Europe’s temporary exemption from U.S. steel-aluminum tariffs expires tomorrow (June 1). The Wall Street Journal late Wednesday reported that the Trump administration will not grant an extension and will instead proceed with implementing the tariffs, possibly announcing that move today.
If the Trump administration does move ahead with the steel-aluminum tariffs, then 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.
Meanwhile, the internal strife at the White House over trade remains in full swing with the trade hawks regaining ascendance. White House trade advisor Peter Navarro yesterday took at shot at Treasury Secretary Mnuchin when he said that Mr. Mnuchin’s recent remark that the U.S.-Chinese trade war was “on hold” was an “unfortunate sound bite.”
China was taken aback by the Trump administration’s announcement on Tuesday that it will release a final list of the $50 billion worth of Chinese products subject to a 25% tariff on June 15 and that those tariffs will be implemented “shortly thereafter.” China accused the Trump administration of “flip flopping” since Chinese thought there was an agreement to hold talks. Commerce Secretary Wilbur Ross and USTR Lighthizer are due to arrive in China on Saturday for a new round of talks.
The Trump administration’s tariff announcement on Tuesday may have simply been a negotiating tactic, but the markets were nevertheless put on notice that the tariffs could now be implemented any time after June 15. If the U.S. goes ahead with its 25% tariff on $50 billion of Chinese goods, then China will almost certainly retaliate with an equal tariff on the $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.
U.S. PCE deflator expected to remain firm — The market consensus is for today’s Apr PCE deflator to be unchanged from March’s +2.0% y/y report. The April core PCE deflator is expected to ease slightly to +1.8% y/y from March’s +1.9%. Today’s PCE deflator report is expected to remain strong enough to keep the Fed in its steady rate-hike mode, but not strong enough to cause any inflation panic at the Fed. Indeed, the Fed has recently tried to reassure the markets that its 2% inflation target is symmetrical and that it will be fine with a modest overshoot of the 2% target.
Unemployment claims expected to remain favorable — The consensus is for today’s initial unemployment claims report to show a -6,000 decline to 228,000 (after last week’s +11,000 to 234,000) and for continuing claims to fall -8,000 to 1.733 million (after last week’s +29,000 to 1.741 million). Layoffs remain near multi-decade lows. Initial claims are +25,000 above April’s 48-1/2 year low of 209,000 and continuing claims are +29,000 above early-May’s 44-1/2 year low of 1.712 million. On the labor front, the market is mainly looking ahead to Friday’s May payroll report, which is expected to show an increase of +190,000, improving from weak reports of +135,000 in March and +164,000 in April. Yesterday’s ADP report of +178,000 was mildly weaker than market expectations of +190,000.
Weekly EIA report — The market consensus is for today’s weekly EIA report to show a -1.0 mln bbl drop in U.S. crude oil inventories, a -1.0 mln bbl drop in gasoline inventories, and a -1.2 mln bbl drop in distillate inventories. U.S. oil production last week rose slightly to a new record high of 10.725 million bpd.