U.S. Economy: Goldilocks Scenario?

U.S. Economy: Goldilocks Scenario?

Inflation hit the 2% target and personal spending picked up in May; The 28-member European Union found a way to agree on immigration policy; Mexico's election looked set to mark a significant change in direction.

“Italy is no longer alone”
Giuseppe Conte, Italy’s new Prime Minister, on the European Union’s agreement concerning immigration policy

U.S. Inflation: Goldilocks scenario?  May’s inflation figures should please the Federal Open Market Committee (FOMC); core inflation for the 12 months ended May 31 came in at 2.0%, right on target and the highest in over six years, and slightly above the consensus expectations of 1.9%.

But personal consumption spending rose 0.2% in May from April, slightly lower than expected and noticeably lower than the 0.4% growth in personal income for the month. That suggests consumers may have been banking the difference – good for household balance sheets, slightly less so for the economy as a whole. Adjusted for inflation, personal spending was flat – 0% for the month.

Fixed-income markets greeted the numbers calmly, with the 10-year Treasury trading at about 2.847%. Equity markets were slightly more enthusiastic, with the major U.S. indexes up about 1%, helping the S&P 500 and the NASDAQ Composite potentially end the first six months of 2018 at gains of 2.5% and 9.5% respectively.

Immigration: The Italian job Friday’s early-morning deal on immigration gave enough to Italy’s newly-minted Prime Minister Giuseppe Conte to allow him to gain credibility with his coalition partners back home. At the same time, German Chancellor Angela Merkel apparently won enough concessions to increase the odds of her fragile coalition government surviving dissent from Bavaria’s Christian Social Union party.

The language of the agreement was noticeably long on principles but short on details of implementation, many of which were left to member states. But as a joint declaration of the principle of “burden sharing” of migrants, the agreement was a step forward.

But there was one carefully-specified item apparently tailored to win Italy’s approval: an agreement to create “controlled centers” in EU member states with “full EU support” to "distinguish between irregular migrants, who will be returned, and those in need of international protection, for whom the principle of solidarity would apply." Euphemisms notwithstanding, the key to this component was the presumed financial and bureaucratic support of the EU in managing these “centers”, a clear improvement over leaving their care to the member countries, whose approach remains varied.

Mexico’s election: Suspense Polls suggest the July 1 Presidential election will be won by firebrand Andres Manuel Lopez Obrador (“AMLO”). Concern about his promises to restore the public sector’s role in the economy via resurgent spending has moved to the back burner in the face of his personal popularity – a shift reflected in the currency market, where the Mexican peso has been moving up vs. the U.S. dollar over the past two weeks – one of the few emerging market currencies to do so.

Of course, the prospect of a president with populist leanings participating in negotiations over NAFTA might not bring about increased policy stability in the continent’s current configuration. And public-sector participation in the economy has a mixed track record in Latin America; observers often mention Venezuela and Cuba in this context.

But the presidency isn’t the only office in the election. All of the Senate’s 128 members, along with all 500 members of the lower house, Mexico City’s mayor and eight of the 31 states’ governors are up for a vote.   



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