Summary: In the first half of May the rate's markets saw a continuation of the trend in April with front-end rates pressured higher. In late May the market took an aggressive risk-off turn with rates rallying across the curve as continued uncertainty around US tariffs and Italy's political landscape drove markets. Specifically, the US imposed tariffs on steel and aluminum imports onto its NAFTA and European Union allies. In response, the impacted countries took their own retaliatory measures, stoking fears of a tit-for-tat trade war. Political developments in Italy dominated the market narrative at month-end, which eventually saw the election of Giuseppe Conte as Prime Minister, ending weeks of uncertainty around the Northern League's/Five-Star Movement's ability to form a new government.
FOMC Meeting/Minutes: In the May statement, the Federal Reserve (Fed) left interest rates unchanged which was in-line with expectations, with policymakers emphasizing the "symmetric" inflation target that would allow inflation to run modestly above or below the 2% target. The latest Federal Open Market Committee (FOMC) minutes underscored a sustained path towards gradual policy normalization, and signaled for an interest rate hike in June. Some participants expressed concern over the flatness of the yield curve and the risk of curve inversion, as well as risks around the tariff and trade developments.
US non-farm payrolls: April non-farm payrolls gained 164K jobs, slightly below expected 192K, displaying another solid month of job gains, with the unemployment rate breaking down to 3.9%, the lowest level since December 2000. The labor force participation rate declined 14 bps (mom) to 62.8% and the headline average hourly earnings rose 15 bps (mom) in April, bringing the year-over-year change to 2.6%. April payroll print is likely to hold virtually no influence on a Fed that has very clearly stated it is moving policy rates three-to-four times this year and probably the same number next year.
Q1 US GDP: The second revision of Q1 GDP was revised lower to 2.2% from 2.3. Consumer spending, which accounts for almost 70% of the US economy, was revised downward driven by services consumption. Additionally, the bulk of the downward revision came from inventories and net exports balance, which could bode well for future readings.
Retail Sales: Headline retail sales increased 0.3% (MoM) in April, broadly in line with expectations. Core retail rose 0.4% (MoM) in April after an upwardly revised 0.5% gain in March. This report showcases that the consumer spending is rebounding from the first quarter weakness driven by solid labor market and higher after-tax incomes.
US CPI: The headline CPI print came in at 0.2% (MoM), and at 2.5% (YoY), while the core measure rose 0.1% (MoM), and 2.1% (YoY), slightly softer than expected. At the headline level, CPI was driven by an increase in energy prices (1.4%) and food (0.3%). The core measure was driven primarily by shelter and apparel prices.