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Week In Review


Nonfarm payrolls rose by 223,000 jobs in May, exceeding consensus expectations. The unemployment rate fell to 3.8%, the lowest it has been since 2000. Average hourly earnings rose 0.3% in May and have risen 2.7% over the last year.

Our Take

Average hourly earnings continue to rise but are not yet at a level which would cause inflation to be persistently above the 2% Fed target. Many at the Fed believe, however, that tight labor markets will cause wage gains to accelerate and that rate increases are needed to prevent the economy from overheating. The strong May employment report all but guarantees a Fed rate hike in June and increases the possibility of four total rate hikes in 2018.


The White House released a statement that the U.S. would identify the Chinese exports to the U.S. that would be targeted for tariffs by June 15, release a proposal on investment restrictions and export controls by June 30, and continue to pursue WTO litigation against China over IP issues. This statement follows shortly after Treasury Secretary Mnuchin talked about putting the trade war on hold, and Commerce Secretary Ross is still scheduled to travel to Beijing for further trade talks. Separately, the Trump administration allowed the exemptions from the steel and aluminum tariffs for the EU, Canada and Mexico to expire, stating that sufficient progress has not been made on NAFTA and other trade negotiations. All three stated that they would impose retaliatory tariffs on imports from the U.S. Canadian PM Trudeau indicated the U.S. positions on a new NAFTA agreement include some items that Canada cannot accept. The White House released a statement that any NAFTA rework would be “a fair deal, or no deal at all.”

Our Take

Any type of trade war or increased restrictions on capital flows is a threat to global growth. The announcement regarding the tariffs and investment restrictions for China seems to be an effort to pressure the Chinese government to act on IP protections. Far more concerning is the hardening positions of the U.S. and Canada with respect to a NAFTA renegotiation. Both sides are saying that they’d rather walk away from talks than make the concessions demanded by the other side for a new agreement. Such an outcome might prompt the Trump administration to attempt a withdrawal from NAFTA. These statements may be just rhetoric to advance negotiations, but events seem to be sliding towards an economically damaging step backwards on free trade.


Italian President Matarella vetoed the populist coalition’s first choice for economy minister and seemed to push the country towards fresh elections with the terms of euro membership as an explicit issue. However, the coalition offered a different economy minister and placed the Eurosceptic first choice as minister for European affairs. The new government was sworn in on Friday and will presumably begin working to implement its agenda, which will cause Italy to be in violation of EU fiscal rules. Spreads on Italian government bonds widened sharply earlier in the week and remain at elevated levels.

Our Take

Matarella’s attempt to push Italy towards fresh elections has failed, and now the populists will have a chance to implement their agenda. If the coalition is able to move legislation to do this, it is very likely that Italian government yields will spike to levels that will render Italy’s fiscal situation unsustainable. To avoid default in such a scenario, Italy would either have to agree to EU and ECB conditions for aid or redenominate its debt and leave the euro.

Personal Income and Spending

Personal income rose 0.3% in April, while spending increased 0.6%.

Our Take

Strong consumer spending was the missing component in first quarter GDP. Q2 GDP could surprise on the upside if April’s strong spending continues for the rest of the second quarter.


Illinois lawmakers approved a $38.5 billion budget plan this week. The House approved the measure on Thursday following the Senate’s 54-2 vote in favor of the proposal on Wednesday. Governor Bruce Rauner has indicated that he will sign the bill, which would mark the first time since Rauner took office in 2015 that Illinois has passed an on-time budget.

Our Take

Many believe that lawmakers did not want to reach the June 1 deadline without passing a balanced budget in an election year. The bipartisan plan passed both the House and Senate by large margins. Illinois still needs to tackle its pension liabilities and unpaid bills, but the balanced, on-time budget is a step in the right direction.