Stone's Weekly Market Guide - Week of May 27, 2018

The June 12 summit between N. Korea and the U.S. appears to be on again for the moment, but markets will be watching closely as the cancelling of the summit and rising trade war fears helped cause the flight to safety last week. Attention will also continue to be paid to some stressed countries: Turkey and Italy. Turkey’s central bank hiked short term rates and implemented a one week repo rate at 16.5% which helped stabilize the Turkish lira on Monday.

U.S. data is focused on the May jobs report should see an improvement with 190k nonfarm jobs created while unemployment holds steady at 3.9%. Average hourly earnings are forecast to hold steady at 2.6% year-over-year. May ISM Manufacturing will likely provide another data point that the U.S. economy is strengthening. Plenty of Fedspeak (including a Volker rule meeting) along with the Beige Book for the bond market to monitor. Markets continue to price in a 100% chance of a Fed hike on June 13.

Our Chart of the Week: Italian politics and fears of growing populism have led to risk aversion and euro weakness. Italian president Mattarella vetoed the nomination of euroskeptic Savona for finance minister. If a technocratic government cannot win a confidence vote, Italy will likely hold an election in September or October. The danger is that euroskeptic parties may actually get a stronger mandate and hold more power to possibly exit euro membership. Continued bouts of financial stress should be expected and are clearly reflected in the chart of Italian 10-year yield spread over German debt which has widened to 280 basis point (2.8%) as of Tuesday morning. While this spread certainly represents well above average market stress, the spread still remains well below peak 2011 and 2012 levels. Also , Italian 10-year yields trading at 3.06% remain reasonable on an absolute basis when compared to the 2011 peak of 6.57% or current U.S. yields at 2.85%.

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