Coming out of Memorial Day weekend, global markets have been gripped by political crises in the European Union, as Italy—the EU’s third-largest economy—will face another election and Spain’s prime minister faces a no-confidence vote, Prudential’s Chief Market Strategist Quincy Krosby said Tuesday in her weekly “Connecting the Dots” outlook.
A flight-to-safety trade has gripped global markets as Italy’s president refused to accept a government formed by two populist, anti-eurozone parties. Italy could face an election by September, an election that could be, in essence, a referendum on Italy’s continued participation in the eurozone. Adding to concerns about the eurozone is a no-confidence vote on Friday for the Spanish prime minister.
“We’ve seen this before in Europe,” Krosby said. “This could be subject to change very quickly, as we’ve seen with other political crises since the downturn. We saw how Greece, Italy, Spain and Cyprus grabbed markets, and as soon as there were negotiations that were more positive and amenable to all parties, the markets quickly changed directions.”
Headlines stemming from ongoing U.S. trade discussions both with China and the European Union will be monitored closely by analysts, as will the potential meeting between the U.S. and North Korea.
A busy week for U.S. domestic data releases will focus on Friday’s payroll report, particularly with regard to wage growth. If wages move materially higher than consensus estimates, expectations for a fourth rate hike from the Fed should climb.
“Higher wages add to the operating costs of companies. This puts pressure on margins and becomes part of the inflationary pipeline,” Krosby said. Wednesday’s ADP report on private payrolls will be looked at by analysts for possible hints as to what Friday’s report will reveal.
Also on Wednesday will be the release of the Fed’s Beige Book. “This is a report from all the Federal Reserve banks across the country. It will give us a fairly up-to-date look at local regional economies, that can help answer the question of how strong the U.S. economy is overall,” Krosby said.
This week’s important economic data:
Tuesday: Case-Shiller Home Price Index; Consumer Confidence (Conference Board)
Wednesday: ADP Private Sector Employment Report; GDP second update for the first quarter; Beige Book release; Fed proposal on the Volcker Rule
Thursday: Personal Income and Outlays (Personal Income and consumer spending report)
Friday: Payroll Report; ISM Manufacturing Index; PMI Manufacturing Index; Construction Spending; Motor Vehicle Sales
Read Quincy Krosby’s full Q2 Market Commentary: Regime Change.
The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.