Market Attention Turns to the Political

Jun 04, 2018
White House DC

Market Attention Returns to the Political

After a week dominated by geopolitical intrigue in Europe (mostly Italy), and first-tier economic releases headlined by the May jobs report, this week will be all about the political angle. First, with the U.S. reinstituting tariffs on steel and aluminum imports on the EU, Canada and Mexico the threat of trade wars has reignited. That’s especially the case after Canada quickly announced its own tariffs on U.S. goods. Meanwhile, while the Italian drama has calmed some it hasn’t gone away as a long-term threat to the EU and add to that the no confidence vote on the Rajoy government in Spain. That development could spawn another populist party assuming power that will further pressure the EU. These events lend themselves to continued safe haven bidding in Treasuries and the dollar.  



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

JUNE 4 – JUNE 8,  2018

1. U.S. Trade Developments — All Week
2. Geopolitical Risks —All Week
3. May ISM Non-Manufacturing Survey—Tuesday
4. April Trade Balance— Wednesday
5. April JOLTs Job Openings — Tuesday



1.  U.S. Trade Developments—All Week

The announcement last week by the Trump administration that they were letting tariff exemptions lapse for the EU, Canada and Mexico has reignited trade war fears and that contributed to safe-haven buying in Treasuries. The Thursday announcement was met with a tit-for-tat tariff announcement by Canada and included denunciations from the EU. Meanwhile, the U.S./China trade negotiations didn’t go well over the weekend.  How this ends is anyone’s guess but for now the tough U.S. stance will lend itself to a risk-off trade and flight-to-safety buying in Treasuries helping to hold gains from the Italy-inspired rally last week.


2.  Geopolitical Risks—All Week

Last week’s news that the newly elected Italian government coalition failed to get its preferred candidate for foreign minister installed, generated severe selling in Italian debt and that created safe-haven buying in Treasuries. The new populist government coalition is going to be a thorn in the side of the EU, even with a less objectionable finance minister than was first proposed.   Meanwhile, the Italian developments have spread to other peripheral government debt causing yields to rise on Spanish, Portuguese, and Greek debt. Also, the Rajoy government in Spain suffered an embarrassing no-confidence vote last Friday, which could lead to a more populist government being installed in Madrid and that too would be another headache for Brussels and a further weakening in the EU. While the outcome of all these political machinations is unknown at this time, they all inspire safe-haven buying in Treasuries and that will provide another source of support in maintaining the gains from the last week’s rally. That led to the 2yr-10yr Treasury spread dropping to the lowest in 11 years.


Treasury Yield 


3.  May ISM Non-Manufacturing Survey—Tuesday

While we received the May jobs report and the ISM Manufacturing Survey last Friday, we’ll get the Non-Manufacturing Survey tomorrow.  The non-manufacturing (services) survey is expected to move slightly higher to 57.6 versus 56.8 the prior month. Anything above 50 indicates an expanding sector so the move from 56.8 to 57.6 while slight still indicates healthy expansion in the services sector which represents nearly 90% of the economy. 


4.  April Trade Balance—Wednesday

The trade deficit was -$48 billion in April 2017 and is expected to be –$49 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. The deficit began the quarter at  -$49 billion, so the expected -$49 billion in April indicates the trade sector will be a non-event on second quarter GDP, at least in April. 


5.  Job Opening and Labor Turnover Survey—Tuesday

The JOLTs report (Job Openings and Labor Turnover) is due tomorrow, and while April data, it does provide a few additional indicators of job market health. The headline job openings number is expected to be 6.350 million versus March’s 6.550 million print, and over the 6.076 million average over the past year,  so another positive view of the labor market is expected. The Quits Rate is another number the Fed utilizes as it measures the rate workers are leaving jobs voluntarily. The rate was 2.3% (quitters divided by total workers) in March which ties December as the cycle high. Thus, a solid read on the jobs market is expected with the JOLT survey.




Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed Securities 


US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research



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