• Italian political uncertainty drove market volatility higher last week, but events calmed by Friday.                     

• U.S. economic growth appears to be accelerating, although growth may be slowing elsewhere in the world.                   

• We think trade and geopolitical risks need to diminish before stock prices can break through their trading ranges.

Equity markets were highly volatile last week, especially early in the week when Italian political turmoil dominated the financial headlines. Trade risks also resurfaced last week as investor uncertainty rose in light of President Trump’s surprising shifts in trade policy. Nevertheless, equity markets made gains, with the S&P 500 Index climbing 0.5 percent.1 Energy and technology were the best-performing sectors, while financials and industrials lagged.1 Treasury markets were also volatile, but wound up being largely unchanged.1

Weekly Top Themes

1. Despite initial fears of catastrophe, Italian political turmoil appears largely contained. Events came to a head early last week when Italian President Sergio Mattarella rejected economist Paolo Savona to be the finance minister in the coalition government. This brought the stability of the entire Italian government into question, with some worrying about a possible Italian exit from the eurozone. It appeared as if Italy would be in for a long period of uncertainty, but the 5-Star Movement and League political parties established a coalition government that was sworn in on Friday.

2. Trade tensions again flared after earlier signs of thawing. The Trump administration unexpectedly announced the United States would move forward with investment restrictions and tariffs on Chinese goods, and stated it would impose tariffs on steel and aluminum imports from the EU, Canada and Mexico. Clearly, trade restrictions remain an economic and financial market wildcard.

3. The May jobs report provides evidence that U.S. economic growth is accelerating. The data was strong across the board: A better-than-expected 223,000 new jobs were created last month while the unemployment rate dropped to 3.75 percent, its lowest level since December 1969.2 Wages also rose, with average hourly earnings increasing at 2.7 percent year over year.2

4. Strong consumer spending also points to improving second quarter growth. Real spending levels in April showed an advance, while March’s numbers were revised higher.3 We think real consumer spending could climb as much as 3.5 percent in the second quarter, which could push gross domestic product growth up to the 3 percent level.

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