Market movers today
Significant market attention will be on the new government in Italy that was formed last night and what policy signals it will send with regard to its economic and EU policy programme.
The market will also focus on trade tensions between the US and EU countries, Canada and Mexico.
On the data front, the most important release of the day is the US jobs report for May. Once again, average hourly earnings is the key number to watch . We estimate wages rose +0.2% m/m in May, in line with the recent trend, implying an unchanged annual growth rate of 2.6% y/y. We estimate that nonfarm payrolls rose 190,000 and the unemployment rate was unchanged at 3.9%.
Based on the regional PMIs and Markit PMI manufacturing, US ISM manufacturing probably rose and we think it may have rebounded from 57.3 to 58.0. This does not change our overall view that the US manufacturing indices should move lower in 3-6M.
In the UK , we also get the PMI manufacturing index for May. The UK index is more volatile (bigger swings) than the equivalent index for the euro area, and since it fell in May, the UK index may very well follow. We estimate a fall to 53.6 from 53.9.
Selected market news
Things move fast in Italy and yesterday Five Star and the League announced they would form a new government. Paolo Savona, who the President rejected as finance minister and has very EU-sceptical views, would be minister of EU affairs, which may create tensions between Italy and the EU down the road. Markets have calmed down somewhat with 2yr yields now at 1% compared to nearly 3% at some point, but still significantly above the levels before the election.
The trade war escalated yesterday as the Trump administration announced it would impose tariffs on steel and aluminium imports from the EU, Mexico and Canada for national security reasons. The EU said it regrets the decision and would retaliate by imposing tariffs on products such as bourbon, jeans and Harley Davidson bikes (products from Republican states) and mainstream Republicans such as House Speaker Paul Ryan are clearly against Trump’s decision. Mexico and Canada also aim to retaliate against Trump’s measures. Trump later threatened to leave NAFTA altogether yesterday. All in all this is bad for consumers and businesses, as it would only lead to higher prices. The risk is that the trade war could escalate further, not only between the US and China but also between the US and other western countries.
In Spain , Prime Minister Rajoy is likely to lose the no-confidence vote today. Socialist leader Pedro Sanchez would likely become the new prime minister but has previously said he wants new elections, although he could stay until 2020 when new elections must be held. It is the first time a prime minister would be ousted this way, which makes it more difficult to predict what could happen. While political uncertainty is negative, the situation in Spain does not seem comparable with the one in Italy (at least right now), as there is no indication that Spain would follow the same route of saying it wants to leave the euro and wants debt relief.