The main highlights last week were: the ongoing political crisis in Italy, and mounting trade tension concerns following the announcements of US tariffs. So a very mixed week across asset classes witnessed Italy’s yield curve sell-off aggressively, with the 2-year yields spiking as high as 2.84% on Tuesday, eventually settling at ~1% following the swearing in of the new (populist) government on Friday. Meanwhile, the yield on the UST 10-year was marginally lower over the week, at 2.9%. The dollar could not hold onto the early-week gains and was down marginally over the week.
In terms of trade concerns, earlier in the week the US announced 25% tariffs on USD 50bn Chinese imports (effective June, 15); the meeting over the weekend between US Commerce Secretary Ross and Chinese Vice Premier Liu He was apparently “friendly and frank” according to the US, but China appeared less content with nothing concrete agreed. On Thursday we heard that the US was to impose metal tariffs on the EU, Canada and Mexico effective June,1. Despite US Commerce Secretary Ross saying NAFTA negotiations are ongoing, we believe recent events have pushed an agreement in the short-term even further out of reach. We will continue to monitor the developments in the coming weeks and remain of the opinion that clearly protectionism is the largest risk to global economic growth, and the US will reap little reward.
As for key data releases, in the US we had a downward revision to Q1’18 GDP, broadly in-line PCE readings (PCE core was at 1.8% yoy in April) and strong employment report. CPI readings across the EU broadly surprised to the upside, and it was very clear that the unfolding events in Italy were steering Bund yields sharply lower; as markets appeared to ignore inflation spiking to 2.2%yoy. Elsewhere, despite the redevelopment of Sino-US trade tensions, the IMF maintained its 6.6% growth forecast for China this year. Also, the official manufacturing and non-manufacturing PMIs surprised to the upside in May and the May Caixin manufacturing PMI print was unchanged from April; recent economic data releases from China continue to indicate sustained economic strength.
In what is a relatively data-light week and Fed blackout, markets will no doubt remain focused on further trade rhetoric, and geopolitical tensions - ahead of the US-North Korea summit which is now back on, scheduled for June, 12. The UK’s construction PMI reading for May and US factory and durable good orders prints could be of interest today, as might EU Trade Commissioner Malmström’s attendance at the UN Conference on Trade and Development. Tuesday kicks-off with more Caixin PMI readings for China, and Japan PMIs. US JOLTS and US and EU PMI readings follow along with EU retail sales. The US’s trade balance is the only key data release of note on Wednesday; currently expected at -USD49.1bn. Thursday sees China's May FX reserve reading and further eurozone PMIs. Japan’s Abe is due to meet Trump in Washington ahead of the G7 gathering, the North Korea summit is expected to be the main focus of the meeting. Japan’s GDP revision and trade balance will be carefully watched on Friday morning along with China’s trade data for May. Further trade developments will be watched as the G7 summit, in Quebec, commences on Friday; we may hear more on Canadian and EU retaliation measures.