By Lance Gaitan
You usually find me sifting through important economic data and analyzing how it’ll affect the Treasury market. That’s my wheelhouse.
We’ll get to that stuff soon, after we talk about the forces (political and otherwise) that moved the markets.
Last week, political volatility at home and abroad left its mark on stocks, commodities, and Treasury bonds.
It started with Italy.
Harry’s been talking about the country’s problems for years. In fact, he wrote about “The European Time Bomb” in last Wednesday’s Economy & Markets.
In short, Italy has massive debt problems…
…to the tune of €350 billion worth of maturities in the next six to eight years. It also has more than €300 billion in non-performing loans, which is more than any other European nation.
It’s no surprise, then, that the recent struggle among the country’s political parties to form a coalition government triggered fears of a default.
Because nothing pairs better with crushing debt than an incompetent government…
A default would likely bankrupt Italy’s social security and pension systems. Public savings and salaries would also be decimated. The global ramifications would be huge.
We got a small taste of that last week, and it wasn’t pleasant.
Here at home, President Trump announced tariffs on steel and aluminum imports from Europe, Mexico, and Canada. These frenemies have retaliatory measures in the works; a trade war is brewing.
This is on top of new tariffs already imposed on China.
Late last week and early this week, the financial world seemed overjoyed about an agreement to form a coalition government in Italy (along with a similar deal in Spain). Stocks and yields bounced higher.
But it remains to be seen how the escalating tariff situation will play out.
Let’s look at the home-grown data.
April personal income increased 0.3% month over month, as expected. Spending, on the other hand, was up 0.6%, doubling the consensus forecast.
The April personal consumption expenditure price index (PCE), the Federal Reserve’s preferred inflation gauge, was up 0.2% month over month at the headline level and if you exclude food and energy. The market expected 0.1% on the latter reading.
Year over year, core inflation was up 1.8%, as expected.
These data points didn’t cause much of a stir in the market.
But Friday morning’s May jobs report surprised to the upside, bigly.
The consensus called for monthly non-farm payrolls to increase by 190,000. Businesses delivered 223,000 new jobs. And the unemployment rate took an unexpected dip, falling below 3.8%.
Most important, earnings were up 0.3%, versus expectations for a 0.2% rise.
One month of data doesn’t make a trend. However, we note that consumer inflation has started to show up in core prices, as wages and spending move higher.
I regard this as a transitory phenomenon. The growing economy has likely peaked, and any inflationary pressures will persist for three to six months.
My definition of transitory differs from the Fed, where officials once used the word to describe a persistent lack of inflation that had lasted for a couple years.
Though unsettling for some, the recent uptick in market volatility .
Other than the political drama here and abroad, there are no major economic reports coming down the pipe for the rest of the week. Stay tuned and stay ready
‘Til next time,
Lance