Economic Backdrop

The swearing in of Italy’s Prime Minister Giuseppe Conte—a relative newcomer to politics—signalled continued viability of the euro-sceptic coalition, which formed from the two populist parties that won the country’s March election. Financial markets were rattled in May by the anti-EU implications of the new Italian government taking shape, then again as rejection of the coalition’s first choice for economy minister seemed to set the stage for another round of elections and associated delays. Spain’s government also experienced turnover as centre-right Prime Minister Mariano Rajoy suffered a no-confidence vote and was replaced by socialist leader Pedro Sanchez at the beginning of June.

A Brexit proposal by UK negotiators for Northern Ireland to have joint EU and UK status was floated in an effort to avoid hard borders, but did not appear to garner much support. Pressure intensified on the Labour Party to agitate for a second referendum once the Brexit deal is finalised, with the expectation that the ‘Remain’ campaign will fare better when concrete details are available.

The Trump administration cited national security concerns as it imposed steel and aluminium tariffs on the EU, Canada and Mexico in late May; this came after the expiration of a two-month waiver that had been extended to these major trading partners, which have traditionally been US allies. All three responded with rebukes and retaliatory measures in the form of tariffs on US goods; additionally, the EU opened a formal case with the World Trade Organisation. The Chinese government appeared to step back from assurances that it would underwrite increased purchases of American products as part of negotiations to reduce its trade imbalance with the US, bristling at re-proposed plans of the Trump administration to apply Chinaspecific tariffs.

The 10-year US Treasury yield touched a seven-year high in May before settling somewhat lower by the end of the month. West Texas Intermediate (WTI) crude-oil prices climbed to their highest level since late 2014, as the US backed out of a multi-party nuclear disarmament agreement with Iran and re-imposed economic sanctions; prices ultimately retreated sharply on reports that the Organization of the Petroleum Exporting Countries and Russia may reach an agreement to raise output. The spread between prices for Brent crude (associated with the European market) and WTI (associated with the US market) widened by the most since early 2015. US stocks werelargely alone among developed markets as they finished May in positive territory; Europe was considerably negative, while the UK was also down. Emerging-market equities performed even worse, especially in Latin America. The US-versus-everywhere-else divide extended to performance in the fixed-income universe as well.

The Bank of England’s Monetary Policy Committee held firm in May, while the European Central Bank and Bank of Japan had no meeting on monetary policy during the month. The US Federal Reserve (Fed) took no new monetary policy actions following its early-May meeting, but asserted willingness to let inflation run above its 2% target in the short-term. The Fed met late in the month to begin unwinding parts of the Volcker Rule, a regulation imposed by the US government after the financial crisis that sharply limited banks from proprietary trading.

UK manufacturing growth accelerated in May following the prior month’s trough, while construction gains were unchanged. Consumer prices increased by 0.4% in April, touching recent monthly highs, but year-overyear inflation dropped to 2.4%. The jobless claimant count edged up to 2.5% in April, while the unemployment rate for the January-to-March period held at 4.2%; average year-over-year earnings growth slid to 2.6% for the three-month period ending March. First-quarter economic growth dropped to 0.1%, the slowest quarterly pace in more than five years, and to 1.2% year over year.

Eurozone manufacturing growth continued to slide in May from its December peak, settling to its lowest level since early 2017; services-sector activity appeared to follow a similar trajectory, based on preliminary data for May. The unemployment rate fell to 8.5% in April after an upward revision to the March figure. A preliminary economic-growth estimate was recorded at 0.4% for the first quarter and 2.5% year over year; both numbers were 0.2% below their respective levels in the prior quarter. Reports of US manufacturing growth were mixed but generally strong. The unemployment rate ticked down to 3.8% in May, the labour-force participation rate declined, and average hourly earnings improved.

Consumer spending increased in April as consumer price measures remained near the Fed’s inflation target. A second estimate of first-quarter economic growth edged down to an annualised 2.2% rate.