This week, the biggest news came from Italy, the fourth largest economy in the European Union (EU). The country has had no government since the election was held in March. After the election, the two main parties – Five Star Movement and League – negotiated to form a government. On Monday, they announced the economy minister who was rejected by the president. In the past, Paolo Savoni had called Italy’s decision to join the euro an historic error. This led to a massive sell-off on Italian and European stocks and the euro.
Yesterday, the two parties announced progress in the formation of a government. The two parties were given the greenlight to form a government after backing off the efforts to populate the administration with people hostile to the European union. In the meantime, this decision will be a good one for the EU and Italy. However, in the long term, it will be a bad thing for the EU as more people start questioning the value of the economic bloc. Most of this sentiment will depend on how the UK performs after exiting the EU.
More big news this week was yesterday’s announcement by the United States about tariffs. A few months ago, the US announced that it would place a 25% and 10% tariff on imported steel and aluminum. They then gave exemptions to a few countries including Japan, South Korea, EU, Canada and Mexico. The exemptions would allow these countries to offer US concessions to avoid the tariffs. South Korea did and was exempted.
The new tariffs, which will be implemented this month, will usher a new era in trade among the world’s biggest allies. They will also present the world with a big experiment on a trade war. In the past, Trump has argued that trade wars are good and easy to win. Now, he will have to prove this. Although tariffs have proven ineffectual and historically have hurt the country imposing them, one had much more dire results reaching far beyond the stock and local market. The trade war of the 1930s set up the ground work for one of the most destructive global conflicts in human history – World War II. The 30s tariffs also known as the Smoot-Hawley Tariff act, extended the Great Depression, reinforced protectionist policies globally and put a choke-hold on countries still recovering from the destruction of WWI – namely Germany, which was still paying reparations from the previous global conflict.
On economic data, we received the inflation and unemployment data from the European union. The inflation in April rose by 1.9%, which was close to the target of 2.0%. The unemployment rate dropped to the lowest level in almost ten years. All this positive data points to a situation where the ECB follows through its earlier announcement of ending the QE in September and hiking rates afterwards. The same hawkish comments were made by the Reserve Bank of New Zealand and Bank of Canada.
US jobs numbers were also a focus among traders. On Wednesday, ADP released the jobs numbers which showed improved hiring, though it missed analysts’ forecasts. Yesterday, data from the census bureau showed that the initial jobless claims continued to fall while wages were slowly edging up. As the labor market tightens, more companies have been forced to increase wages and sign up bonuses. Later today, the labor department will release the official jobs numbers. Traders expect the unemployment to remain at 3.9% and more than 189k people to have been employed in May.