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Shaky Confidence and Italy - May 28, 2019

“With all the Tariff Fees...When Should We Expect a Tax Break?”

 Recent data failed to boost spirits following last week’s barrage of tariff-related developments. Case-Shiller Home Price growth continues to decelerate, Durable Goods Orders dropped, and New Home Sales disappointed (though they did so on the back of robust upward revisions). Complementing this dour mood is the continued inversion of the 10yr – 3month yield curve, which pessimists point out is the San Francisco Fed’s “most reliable [recession] predictor”. Include today’s Dallas Fed Survey, which missed by a whopping 185%, and it’s no surprise to some, the sky appears to be falling.

However, this is perhaps just a little rain. Yes, most of the components of the Dallas Fed survey dropped vs. April, but there was some good news. First, “labor market measures suggested stronger employment growth and longer workweeks in May”. The show of confidence in the labor market was echoed by the Conference Board’s survey’s employment data. Second, some of the negativity could stem from uncertainty, particularly about trade-related issues. This was evidenced by the large jumps in the expected Prices Paid for Raw Materials and the Outlook Uncertainty Index. The comments also pointed to some dispersion in opinion and potential lack of confidence in the current administration’s ability to handle ongoing trade disputes. While one survey participant reported that “we are at maximum capacity and turning away business”, several others were less sanguine, responding “uncertainty has increased”, “many unknowns” and “uncertainties around tariff battles”. It appears that one owner was not alone when reporting “we continue to be concerned regarding the volatility of the decision-making process at the higher levels”.

 “Particularly Serious Non-Compliance”

 Although tensions between Italy and the European Commission (EC) appeared to have faded since we last detailed their potential butting of heads, tensions are flaring up again. Bloomberg writes it appears that the EC is considering starting the process to punish Italy for failing to rein in its debt. As chronicled in a November 21, 2018 report, not only are Italy’s deficit and debt outside of acceptable levels relative to GDP, but it has also “failed to make sufficient progress toward compliance” as its debt has snowballed. However, Italy is not likely to take a potential $4 billion fine sitting down. Following impressive results for his Lega party in the recent European parliamentary elections, Italian Deputy Minister Matteo Salvini says he has “a mandate to completely, calmly and constructively re-discuss the parameters that led to unprecedented job instability, unemployment and anxiety.” Such a confrontation could play into Salvini's hands and increase his popularity at a time when the German economy is weak and global geopolitics is flaring up again. Game on!