Focus on Payroll Reports and trade war
Markets will focused on today US labor report. Acceleration in GDP growth increase the risk that job gains continue to rise. The worry is that employees will begin to feel the effect of labor shortages and are forced to raise pay to attract workers. Todays labor report will again focus on wage inflation rather than the headline NFP read. A surprise in average hourly earnings will increase concerns that labor –cost are now at a tipping point, with acceleration the next phase. USD positioning will be dependent on today’s numbers. Higher than expected wage growth will fuel expectation for consumer inflation outlook and will steepen the Fed interest rate path, forcing USD and US rates higher. Given the surprise recovery from soft 1Q there is a significant risk of upside move in wages today.
In the short -term we are constructive on USD against low yielding G10 currencies but in broader term see EUR as oversold and watch for a correction as political fears fade. Elsewhere, in retaliation to announcement of 25% duties on imported steel and 10% on aluminum tariffs on EU, Canadian and Mexican imports the EU stated they would impose their own tariffs. The EU have indicated retaliatory tariffs on €2.8bn on American imports. Clearly, this aggressive strike and counter strike has significantly increased the probably for an international trade war. However, at this point we have not seen contagion into risky assets. Suggesting, market expected that cooler heads will eventually prevail. Or perhaps markets are just waiting for the main event US-China.
Investors are nervous about Italy’s new government
The FX market reacted little to the announcement of a coalition government in Italy. President Sergio Mattarella finally approved the list of ministers presented by Prime Minister Giuseppe Conti. The single currency reported some modest gains against most of its peers. Obviously, safe haven currencies fell the most as the risk sentiment improved somewhat. The Japanese yen slid 0.30% against the single currency with EUR/JPY sliding to 127.50, while EUR/CHF consolidated around 1.1530. On the other hand, the equity market’s reaction was sharper as the FTSE MIB surged 2.65% to 22,350 points. Italian banks were leading the charge with Banco BPM up 7.25%, BPER Banca up 6.25% and UBI Banca rising 5.75%.
The new government is formed of Matteo Salvini (leader of the League) as interior and deputy prime minister, Luigi DI Maio (leader of the 5-satr movement) as industry and deputy prime minister, Enzo Moavera Milanesi as foreign minister, Giovanni Tria as finance minister, Elisabetta Trenta as defence minister, while the Eurosceptic economist Paolo Savona, who was refused as finance minister, will be in charge of EU affairs. The government will be sworn in today. Italian sovereign yields continued to eased ahead of the weekend: the 2-year fell to 0.74%, while the 10-year one reached 2.60%.
Despite this good news, investors are not sleeping soundly yet. Indeed, the Italian government has a busy program and it is not exactly in line with what Brussels likes, especially in term of immigration and budget policy. Therefore, we expect that the market will not switch fully into risk-on mode, especially against the backdrop rising trade tensions between the US and EU – among other countries.
