Market movers today
Politics will remain a hot topic this week. The Italian budget projections will continue to be a theme for financial markets as well as the reaction from the European commission and rating agencies. In the UK, the Conservative Party Conference began yesterday (runs until Wednesday), which is going to be interesting, as the Brexit end game has begun, see Brexit Monitor: Get ready for the end-game, 27 September.
Today, we get the US ISM manufacturing for September. ISM has been too high compared to reality for a couple of years and, in our view, is a poor indicator at the moment. We estimate the ISM index fell to 60 from 61.
In the Scandies, Swedish PMI is on today’s agenda.
Selected market news
The Italian budget announcement from Thursday night was the main market theme on Friday. Concerns about debt sustainability have clearly returned to the markets and we maintain a cautious stance towards Italy, not least due to possible negative reactions from rating agencies. The 2019-21 budget deficit ended up at 2.4% of GDP, well above market consensus (and could be even higher depending on realism of the revenue assumptions) and is likely to trigger downgrades from rating agencies, in our view. During the weekend, Italian Finance Minister Tria said that Italy targets growth at 1.6% in 2019 and 1.7% in 2020. The detailed document underlying the announced deficit is yet to be published, but on the face of it, the growth assumptions seem to be on the high side.
In the US, PCE core was slightly weaker than expected. In annual terms, it rose 2.0%, which does not alter the Fed’s plan to be on autopilot until 3% is reached, most likely in June next year. Even if inflation surprises on the upside and moves above 2%, the Fed has indicated tolerance, as it has missed the inflation target for so many years.
The weak euro area core inflation number of 0.9% covering September released on Friday is somewhat at odds with ECB communication about a ‘relatively vigorous pickup in core inflation’ and indicates the changed Phillips curve relation.
The Chinese Caixin index rose to 54.1, driven by the non-manufacturing component. More importantly, the manufacturing component declined to 50.8, a level not observed in more than six months. In particular, the new export orders fell most in more than two years as US-China trade frictions are weighing on purchase managers. The manufacturing PMIs are likely to stay somewhat subdued given a deal seems unlikely before well into 2019.
Overnight, a replacement for the NAFTA agreement was announced. It remains a trilaterial agreement but is now called the US-Mexico-Canada agreement (USMCA). At the time of writing, the details on the new agreement have not been not disclosed, but according to news media, the USMCA should incentivise more car production in the US, new market access for farmers but with no agreement on Canadian steel and aluminium at this stage. The agreement is a ‘win’ for President Trump.
