The U.S. Economy Created 223,000 Jobs in May and the Unemployment Rate Dropped to 3.8%… The number of jobs beat expectations and the unemployment rate is the lowest since 1969.
What it means – The solid jobs numbers mark a rebound after a few disappointing employment reports this year. As previously reported, the weak numbers earlier this year, and now the positive numbers today, aren’t big enough deviations from the average to be worried about. We’re discussing changes of 30,000 to 50,000 in a report that covers 155 million people. Essentially, things are still clicking along at a moderate pace.
Average hourly earnings expanded by 0.2%, just ahead of expectations, and the annual change increased 2.7%, again just above the estimate. This gives the Fed a solid reason to raise rates this month.
For those keeping track, our old friend the birth/death adjustment also came into play this month, adding 205,000 non-seasonally adjusted jobs. The Bureau of Labor Statistics is still making up numbers.
S&P CoreLogic Case-Shiller Home Price Index Up 6.8% Year-Over-Year in March… The monthly gain of 0.5% was just shy of expectations, 0.7%.
What it means – It’s hard for home prices to keep growing at nearly 7% when inflation is near 2% and wage growth is around 2.5%. With new and existing home sales softening a bit, it’s probably more incredible that prices continued to climb in recent years despite soft inflation and income data. But modest monthly growth and a retreat from annual growth near 7% isn’t the same as a decline, and sales prices for existing homes haven’t wavered. Real estate might be slower than in years past, but so far, it’s not turning down.
U.S. Imposes Steel and Aluminum Tariffs on EU, Canada, and Mexico… The Trump Administration let the stay on tariffs expire.
What it means – Our allies and trade partners tried to persuade Trump over the last 30 days that such tariffs are a bad idea, but to no avail. Now that the tariffs are in place, U.S. companies will have to pay more for the raw material, driving up costs for both producers and consumers. It’s unclear if our trade partners will make concessions to get the tariffs lifted.
Trump Administration Considers Curbing Foreign Auto Sales… The President has alluded to limiting foreign auto sales in the U.S. until other nations allow equal access to U.S. auto companies.
What it means – In another piece of the trade war/negotiation puzzle, Trump has set his sights on autos. Toyota is nervous. The Japanese car company increased imports to the U.S. by 22% in April, and the number one selling Toyota model, the RAV4, is not made in the U.S. Apparently Trump is particularly focused on German luxury brands, noting that few American cars are sold in Germany. It’s getting hard to keep track of the different trade battles that Trump and company are waging.
European Inflation Up 1.9% Over Last Year… The headline number was driven by significantly higher energy prices. Excluding energy, food, alcohol, and tobacco, prices rose 1.1%.
What it means – Even at a modest 1.1%, the core inflation numbers will give the bankers at the ECB some much needed relief because inflation is headed in the right direction. Last month’s 0.7% core inflation print raised the fear that Europe is moving back toward deflation, which would require the ECB to keep printing money and buying bonds well past 2018. The latest figures revive the hope that the central bank can begin winding down the bond buying operations.
Italian Politics Roil the Financial Markets… Two Euro-skeptic political parties banded together to govern Italy and wanted to seat an economic minister hostile to the European Union, raising the possibility that Italy might take steps to rebuff EU financial rules or even leave the common currency.
What it means – This reopens the European debt can of worms. Over the past several years, investors have grown complacent about the non-performing debt that still hangs over European banks. The ECB and its brethren bailed out Greece not because they want to vacation on the Southern shores, but because Greece owed money to banks across Europe. If Greece quit paying then banks throughout the eurozone would suffer.
About 17.4% of Italian loans are non-performing. If we generously assume that these banks have a 10% capital cushion, then they only have 92.6% of the assets needed to pay off their depositors. That’s bad.
If Italy thumbs its nose at EU financial guidelines, or worse yet, tries to leave the euro, it’s possible that Italy would adopt a new currency and quickly devalue it to regain its economic footing. This would leave central banks and private banks across Europe holding the bag.
For now, this seems unlikely. ECB leaders will bang the table demanding that Italy toe the line and will also promise to do whatever is necessary to protect the euro. That should get us through 2018, but the problem of bad debt isn’t going away, and the Italians appear just as angry at EU and ECB meddling in their finances as the Greeks.
Chinese Company Cleared to Deliver Meals Via Drone… Alibaba’s meal company Ele.me received approval to deliver food orders in Shanghai’s Jinshan Industrial Park using drones.
What it means – It’s cool to get your take-out food delivery via drone, but not as cool as it sounds. The company can only use drones in a small section of town, and there are two designated drop-off sites. It’s not as if a drone is landing on your doorstep. Still, the move shows the next phase in efficient delivery in congested, highly-populated areas. Using drones for delivery in this part of town should cut down on delivery time and energy use because delivery drivers no longer wait in traffic.