USD and US rates may rise waiting for payroll data
By Peter Rosenstreich
Markets will focus on today’s US labor report. Acceleration in GDP growth will increase the risk that job gains continue to rise. The worry is that employers will begin to feel the effect of labor shortages and are forced to raise pay to attract workers. Today’s 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 costs 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 movement in wages today. In the short-term we are constructive on USD against low yielding G10 currencies but in the longer term see EUR as oversold and watch for a correction as political fears fade. Elsewhere, in retaliation to the 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 probability of an international trade war. However, at this point we have not seen contagion into risky assets suggesting markets expected that cooler heads will eventually prevail. Or perhaps markets are just waiting for the main US-China event.
Italy: despite government investors are not sleeping soundly yet
By Arnaud Masset
The FX market reacted calmly to the announcement of a coalition government in Italy. President Sergio Mattarella finally approved the list of ministers presented by Prime Minister Giuseppe Conte. 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 markets 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 by Matteo Salvini (leader of the League) as Interior and Deputy prime minister, Luigi Di Maio (leader of the 5-Star movement) as Labour and Deputy Prime Minister, Enzo Moavero Milanesi as Foreign Minister, Giovanni Tria as Finance Minister, Elisabetta Trenta as Defence Minister, while the Eurosceptic economist Paolo Savona, who was rejected as Finance Minister, will be in charge of EU affairs. The government will be sworn in today.
Italian sovereign yields continued to ease 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 of rising trade tensions between the US and EU – among other countries.