Turmoil in Italy Drives Flight-to-Safety Trade in Treasuries

May 29, 2018
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Short But Busy Week Ahead

This week may be short but it’s still chock full of first-tier economic releases that will give us a good gauge of the economy as it moves through the second quarter. The top release will be Friday’s May job report and the headline job growth  number is expected to strengthen from April (190k vs. 164k). Other metrics within the report are expected at or slightly better than the April prints. Before the jobs numbers on Friday, the April personal income and spending figures will give us a feel for the state of the all-important consumer and their income and spending trends with near identical results to March expected. Overlaying these releases, the market will be focused on European (i.e., Italian) geopolitical risks  with continuing flight-to-safety Treasury rallies  a real possibility.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

MAY 29 – JUNE 1,  2018

1.  May Employment Report — Friday
2.  April Personal Income & Spending — Thursday
3.  May ISM Manufacturing — Friday
4.  April Goods Trade Balance — Wednesday
5.  April Pending Home Sales — Thursday

 

 

1.  May Employment Report — Friday

The May jobs release is expected to be yet another on-trend report with monthly job growth of 190,000 versus 164,000 in April with the unemployment rate remaining at 3.9% after falling 2/10ths in April. The monthly average gain in jobs over the last year has been 190,000 so the May number is expected to be right on that average.  Once again, average hourly earnings will be the key metric and it’s expected to increase 0.3% MoM representing a nice boost from the disappointing 0.1% April increase.  Year-over-year average hourly earnings are expected to stick at 2.6% for the fourth straight month.  The average over the past year has been 2.6%YoY, so an on-average print is expected and one that will delay for yet another month the hoped for wage acceleration that workers and the Fed are looking for.

 

2.  April Personal Income & Spending — Thursday

With 2/3rds of the economy tied to consumer consumption the monthly personal income and spending numbers are always a key for the economic outlook.  Personal income is expected to rise by 0.3% matching the print in March.  Personal spending is expected to rise 0.4%, matching the March print. The yearly MoM averages have been 0.3% for income and 0.4% for spending so on-average prints in both are expected.  Real spending—adjusted for inflation— is expected to increase 0.4% matching the March result.   The results indicate that while first quarter consumption was the lowest in nearly five years, March and April appear to reflect a nice rebound from earlier in the year. If the expected April spending gains can be sustained it bodes well for a rebound in consumption in the second quarter which has been the trend over the past three years.  The important Core PCE (YoY) is expected to tick down from 1.9% to 1.8%.

 

Core PCE YoY 

 

3.  May ISM Manufacturing Survey — Friday

The ISM Manufacturing Survey is expected to print 58.2 versus 57.3 in April.  Anything above 50 represents an expanding sector so the survey should show continued strength in the manufacturing sector, with a slight increase over April.  The average over the past year has been 58.4 so while the May result is expected to show a pick-up over April, but likely to remain just under the yearly average.

  

4.  April Advance Goods Trade Balance — Wednesday

Despite the dollar weakening over the past year the trade balance deficit hasn’t improved.  The goods trade deficit was -$67 billion in April 2017 and is expected to be –$71 billion for April 2018, despite a 7% drop in the dollar during that time. That drop should have boosted exports via cheaper product prices and narrowed the trade deficit, all other things equal. What it does signal is that while foreign economies have strengthened over the past year, the U.S. economy continues to outpace that strength, thus a continued widening in the trade deficit. Also, in the past month the dollar has rebounded by 2% which will increase future export prices. The deficit began the quarter at  -$68.3 billion, so the expected widening to -$71 billion indicates the trade sector will be a drag on second quarter GDP.

 

5.  April Pending Home Sales — Thursday

Recent housing sales numbers (New and Existing Sales) missed expectations last week and this week brings more housing-related reports with the S&P CoreLogic CS 20-City Home Price Index for March and Pending Home Sales for April. The S&P report is expected to show a year-over-year price increase of 6.40% vs. 6.80% in February. Meanwhile, pending home sales for April (based on contract signings) are expected to be up 0.8% MoM vs. 0.4% in March while YoY is expected down –4.4% versus –4.4% in March. If expectations come to pass it does begin to look like some plateauing in sales is occurring with real estate analysts blaming it equally on limited inventory and higher interest rates. However, if the recent rally in Treasuries exhibits more legs, it should flow through to slightly lower mortgage rates and lessening that headwind to sales.

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed Securities 

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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