Daily Market Color May 31, 2018Trade Tariffs Enter Spotlight as Italy Fears Subside Jeff Davenport Italy Crisis Cools, Tariff Threat Heats Up Financial markets fluctuated throughout the day as headlines of a newly formed Italian coalition government brought a sense of calm to investors while the uncertainty over potential tariff trade wars with Canada, Mexico and the European Union weighed on the positive sentiment. Earlier today it was announced that the League and the 5 Star Movement, the two central anti-establishment parties in Italy, agreed to revive their coalition government and could have a new administration sworn in as early as tomorrow. The plan was subsequently approved by Italian President Sergio Mattarella and has placed Giuseppe Conte, the former lawyer and academic, as the prime minister of the alliance. Today’s deal effectively ends the week long impasse in Rome and serves to provide a bit more clarity around the future makeup of the EU’s third largest economy. An additional problem for the EU lies within the US steel and aluminum tariffs, which are set to become effective tomorrow. Along with Canada and Mexico, the EU threatened with retaliatory tariffs of their own that would total in the billions of dollar and would be instated within the month. All three major US stock indices retreated during the trading session, as the DJIA dropped 1%, S&P 500 fell 0.7% and Nasdaq shed 0.3%. US Treasurys finished the day with a mild selloff, with yields/swap rates climbing 1-4 bps across the curve in a bear flattening pattern. The US dollar also extended yesterday’s decline, falling 0.1% against major currencies. In commodities markets, gold futures decreased by 0.14% to $1,299/ounce while WTI crude held near even to close the month at $67.10/barrel. Consumer Spending Continues to Climb The Commerce Department’s report on personal income and consumer spending for April headlined today’s economic data reporting. Detailed in the report, personal income rose 0.3% last month (matching estimates), while consumer spending, which accounts for 70 percent of US economic activity, surged 0.6% MoM (+0.4% expected) as spending at gas stations rose 0.7%. During the same time period, Americans’ personal saving rate slipped 0.2% to 2.8%. Inflation data in the report showed consumer prices increasing at a steady clip as the PCE index, the Fed’s preferred measure of inflation, increased 0.2% in April, yielding a 2.0% annualized rate. The core PCE index managed a 0.2% rise MoM and 1.8% YoY (just below Fed’s 2% target). Other key economic data released today included a report from the Labor Department which showed initial jobless claims in the US declining more than expected and holding near historic lows. The number of new claims for the week ended May 26th decreased by 13,000 to a seasonally adjusted 221,000 (228,000 expected), while the four-week moving average of claims ticked higher by 2,500 to 222,250. Also detailed in the report, the number of continuing claims fell by 16,000 to 1.726 million for the week ended May 19th. Tomorrow the Labor Department will release its more comprehensive monthly employment report, where median forecasts point to a 190,000 nonfarm payroll addition and a 3.9% unemployment rate.