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Italian industry has shown it is temporarily less vulnerable to supply disruptions, but we suspect that this will not be enough to prevent another GDP contraction in 2Q22, marking the start of a short-lived technical recession In this article Flat production after an extremely volatile start to the year Sector breakdown confirms previous patterns Unlikely improvement over 2Q22, in the current circumstances Italian industrial production stabilised in March Flat production after an extremely volatile start to the year After an extremely volatile start to the year, Italian industrial production stabilised in March, the first month fully encompassing the start of the war in Ukraine. According to the national statistics agency Istat, in seasonally-adjusted terms, production was flat on the month and up 3% year-on-year when adjusted for working days. This is better than expected and somehow confirms that Italian industry remains less vulnerable to supply chain disruptions than other major European countries. In March, the production index was still 2.7% higher than in pre-pandemic February 2020. Sector breakdown confirms previous patterns All big aggregates posted monthly gains, with the exception of intermediate goods. When looking at the yearly changes for the first quarter, within the manufacturing domain, the production of refined products, textiles and apparel, electronic equipment and pharma led the growth ranking. At the other end of the spectrum, the worst performers were plastics and non-metal mineral products, the latter likely most affected by the sharp increase in the price of gas, an essential energy input in many processes. Unlikely improvement over 2Q22, in the current circumstances Looking forward, it is hard to believe that Italian industry will not be affected by the ongoing combination of supply chain constraints, high energy prices and softening consumption. Since March, business surveys have been pointing towards a softening of orders, less markedly for capital goods, and in parallel to a downward revision of production expectations. We are not talking about free falls, but more likely adjustments to a new temporary reality against a backdrop of decent domestic fundamentals. With uncertainty about developments of the war and with energy markets still elevated, we believe that the second quarter will unlikely mark a rebound after the 0.2% quarter-on-quarter contraction of 1Q22. We stick to our base case of a technical recession, but take stock of positive indications coming from the tourism sector, which might contribute to a decent rebound in 3Q22. We are currently forecasting average Italian GDP growth for 2022 at 2.3%. TagsItaly industrial production Italy GDP Italy   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

August 10, 2022  $USD, China, CPI, Currency Movement, Inflation, Italy, UK Overview: The US dollar is trading with a heavier bias ahead of the July CPI report. The intraday momentum indicators are overextended, and this could set the stage for the dollar to recover in North America. Outside of a handful of emerging market currencies, which include the Mexican peso and Hong Kong dollar, most are trading lower. Losses in US equities yesterday and poor news from another chip maker (Micron) weighed on Asia Pacific equities. Europe’s Stoxx 600 is steady and US futures are a little higher. The US 10-year yield is going into the CPI report softly around 2.76%. The US Treasury sells 10-year notes today as the second leg of the quarterly refunding. European benchmark yields are 2-3 bp lower. Gold continues to press against the $1800 cap. It has not closed above it for over a month. September WTI is hovering around $90. It appears stuck for the time being in an $87-$93 range. US natgas is about 1.1% higher after rising 3.2% yesterday. Europe’s benchmark is up 3%. It rose 1.5% yesterday. Iron ore is flat, while September copper is about 0.5% stronger after a small loss yesterday snapped a three-day advance. September wheat is up 1%, as it extends this week’s rise. If sustained, it would be the third consecutive gain, which matches the longest rally since March.   Asia Pacific China's July inflation readings underscore scope for easier monetary policy, but officials have shown a reluctance to use this policy lever. The key one-year medium term lending rate will be set in the coming days, but it is unlikely to be reduced from the 2.85% rate since January. July CPI rose to 2.7% from 2.5%, its highest level in two years, but shy of the 2.9% median forecast in Bloomberg's survey. Food prices were up 6.3% from a year ago, driven by a 20.2% jump in pork prices, the first rise since September 2020. Fresh food prices rose 16.9% and vegetable prices rose almost 13%. However, this seems to be a function of supply, while demand still seems soft. Service prices pressures slowed to 0.7% from June's 1.0% increase. The core rate eased to 0.8%. Meanwhile, producer price increases slowed to 4.2% from 6.1%. The median forecast (Bloomberg's survey) was for a 4.9% increase. Chinese producer prices have slowed for nine consecutive months. It peaked at 13.5% last October. Japan's well-telegraphed cabinet reshuffle was not about policy. Key ministers kept their posts, including the finance minister and chief cabinet secretary. Former Prime Minister Abe's brother, Defense Minister Kishi was replaced by Hamada, but he will stay on as a national security adviser. Trade Minister Hagiuda, an Abe acolyte was replaced by Nishimura, also for the Abe faction, but will become party policy chief. Prime Minister Kishida named his one-time rival Takaichi as minister of economic security. The reshuffle seemed to be about re-balancing power among the key factions and solidifying the government whose support has waned. The next economic policy focus may be on the drafting of a supplemental budget. In terms of monetary policy, BOJ Kuroda's term ends next April, while the term of his two deputies ends in March. The dollar is in narrow range of less than half a yen today, hovering around JPY135.00. It did edge above yesterday's JPY135.20 high but held below Monday's high slightly below JPY135.60. The exchange rate will likely take its cues from the reaction of the US Treasury market to today's CPI report. The US 10-year yield remains within the range set at the end of last week with the stronger than expected employment report (~2.67%-2.87%). The Australian dollar held support near $0.6945 but has stalled near $0.6975 in the European morning, where this week's hourly trendline is found. Intraday momentum indicators are stretched, suggesting that even if there is some penetration, follow-through buying may be capped. There are options for A$400 mln at $0.6985 that expire today. The greenback edged a little higher against the Chinese yuan, but it remains subdued. It is well within recent ranges. The dollar's reference rate was set at CNY6.7612, slightly above expectations (median in Bloomberg's survey) for CNY6.7606. Europe The more potent risk is not that the center-right wins next month's Italian election. That is increasing looking like a foregone conclusion. It is hard difficult to tell how much this reflects the judgment of voters and how much reflects the ineptitude of the center-left parties. The risk is that the center-right secures a two-thirds majority in both chambers, which would make constitutional changes possible. A poll published yesterday by Istituto Cattaneo shows the center-right drawing 46% of the vote and securing 61% of the deputies and 64% of the Senators. Analysis by Istituto Cattaneo suggested that even if the center-right saw its share of the votes go up, it might not be able to increase the number of deputies or senators. Italy's 10-year premium over German has fallen in eight of the past ten sessions, including today. It is around 2.10% today, slightly more than 25 bp off its recent peak, and a little below its 20-day moving average. Italy's 2-year premium fell to 0.73% yesterday, the lowest since mid-July. It peaked above 1.30% in late July.  Ironically as it may sound, but it is not Italy's center-right that is attacking the Bank of Italy or the European Central Bank. It is Truss who is leading Sunak to become the next leader of the Conservatives and Prime Minister. BOE Governor Bailey warned that UK was about to go into a five-quarter contraction (that does not even count the 0.2% contraction that economists expect the UK will announce for Q2 ahead of the weekend). Truss quickly responded that her GBP39 bln tax cuts (~$$7 bln) could avert that scenario. Sunak hiked the payroll tax this past April. She would unwind it. Truss would suspend the green levy on household energy bills and nix Sunak's corporate tax increase that was to be implemented next year. The swaps market is 85% confident of a 50 bp hike at the mid-September MPC meeting, less than a fortnight after the new Tory leaders is chosen. In the last two meetings of the year, the swaps market is pricing another 75 bp in hikes.  The euro is first firm holding above $1.02 so far today, the first time since August 1. However, it remains within last Friday's range (~$1.0140-$1.0250). The 1.2 bln euro options at $1.0210 that expire today likely have been neutralized ahead of today's US CPI report. The session high, slightly above $1.0225 was set in the European morning. This stretched the intraday momentum indicator, and we suspect it will probe lower now. Initial support below $1.02 is seen in the $1.0170-80 area. Sterling is in the same boat. It too is consolidating within the range seen before the weekend (~$1.2000-$1.2170). The push to session highs, a little above $1.21, in Europe has stretched the intraday momentum indicators. The risk is for a return to the $1.2050-60 area. America Today's CPI report is interesting but at the risk of exaggerating, it does not mean much. First, the strength of the employment data, even if flattered by seasonal adjustments or is incongruous with other labor market readings, suggests the labor market slowdown that the Fed wants to see is still in the very early stages. Second, as we have noted, financial conditions have eased recently, and the Fed has pushed back against this. Third, before the FOMC meets again, it will have the August CPI in hand. Fourth, no matter what the data shows today, it will not and cannot meet the Fed's definition of a sustained move toward the 2% target. The median in Bloomberg's survey has converged with the Cleveland Fed's Inflation Nowcast. The median in the survey is for an 8.7% headline rate (down from 9.1%) and a 6.1% core rate (up from 5.9%). The Cleveland's Fed Nowcast has it at 8.8% and 6.1%, respectively. The Fed funds futures market has about an 80% chance of a 75 bp hike next month discounted. It may not change very much after the CPI report.  The US Treasury sold $34 bln 1-year bills yesterday at 3.20%. That represents a 24 bp increase in yield. The bid-cover dipped but was still three-times oversubscribed and the indirect bidders took down almost 63%, a sharp rise from a little less than 51% last time. The US also sold $42 bln 3-year notes, also at 3.20%. This was an 11-bp increase in yield. The bid-cover edged up to 2.5% and the indirect participants took 63.1% of the issue, up from 60.4% previously. Today, Treasury goes back to the well with $30 bln 119-day cash management bill and $35 bln 10-year notes. At the last auction, the 10-year was sold at 2.96%. In the when-issued market, the 10-year yield is about 2.79%. The US dollar traded between around CAD1.2845 and CAD1.2900 yesterday and remains in that range today. There are options for almost 1.15 bln at CAD1.29 that expire today. The greenback slipped to session lows in Europe but as in the other pairs, we look it to recover. A move above the CAD1.2910 area could spur a move toward CAD1.2950. Mexico reported slightly higher than expected inflation yesterday. It underscored expectations for a 75 bp hike by Banxico tomorrow. The US dollar is offered against the peso today and it is pressed near yesterday's low around MXN20.20. The top side is blocked around MXN20.27-MXN20.30. Options for around $765 mln at MXN20.30 expire today. A convincing break of the MXN20.20 area could target the MXN20.05 area    Disclaimer

The deterioration is more marked in manufacturing and less so in services, which are benefiting, alongside retailers, from a prolonged tourism-related re-opening effect. We expect Italy to avoid a quarter-on-quarter GDP contraction in the third quarter of the year, but not in the fourth quarter We think the Italian economy will avoid a GDP contraction in the third quarter, mainly on the back of a protracted tourism-related re-opening effect   Qualitative evidence continues to point to a deterioration of the economic environment over the third quarter. This is what confidence data for August are telling us, with some exceptions. Manufacturers more downbeat This is more apparent in the manufacturing sector, where confidence fell two points between July and August, the lowest reading since last February. The fall in confidence was more marked for intermediate and investment goods, where orders are softening and inventories of finished goods are increasing, but with only a limited bearing on production expectations. Consumer goods were less affected, though. Here, the softer deterioration in orders did not prevent a soft improvement in production expectations. Retailers substantially more upbeat, likely reflecting an ongoing re-opening effect In a way, the detail in the manufacturing survey shows that in the midst of the summer, the re-opening effect which had likely strongly affected 2Q22 growth data (we will know the details next week) was still at work in 3Q22. This seems confirmed by other parts of the business survey, more specifically by the sharp increase in retailer confidence, which reached pre-Covid levels in August. Tourism businesses happy about current activity levels Confidence held up better in the service sectors, where the headline index lost only half a point. The re-opening effect is still at play there too, but some warning signals are starting to emerge, in particular in the tourism sector (where we still lack official data on arrivals for 3Q22). Here, judgements about current turnover are even improving, but the evaluation of orders is softening and expectations about future orders are dropping. Comforting rebound in consumer confidence The idea that the re-opening effect might have continued over the summer is finally supported by another bit of good news coming from the consumer front: the rebound of consumer confidence is back to June’s level. The absolute level of the index remains very low (close to 2020 lows), but August’s rebound signals that the deterioration did not accelerate over the summer. The resilience of the labour market (helped by tourism-related hirings) and the strong measures put in place by the government to limit the impact of gas and electricity price shocks on households’ balance sheets have very likely supported consumers’ spirits. Italy might avoid a GDP contraction in 3Q22 All in all, today’s confidence report supports our view that over 3Q22, the Italian economy will temporarily manage to avoid a GDP contraction, mainly on the back of a protracted tourism-related re-opening effect. However, as the summer season is over, we suspect that both services and manufacturing will act as a drag on growth, bringing GDP growth into negative territory both in 4Q22 and 1Q23. As far as 2022 is concerned, we confirm our forecast of a 3.3% average GDP growth. Read this article on THINK TagsItaly GDP Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

With energy still in the driving seat, calls for more government action are intensifying. For headline inflation to reach its peak, we will likely have to wait for the incoming recession to set in and impact business pricing power It is clear that the measures put in place by the government has only managed to slow down the acceleration of inflation Headline inflation at a 37-year high In August, the preliminary NIC CPI index increased by 8.4% year-on-year (from 7.9% in July), the highest level since December 1985, and the harmonised index by 9% YoY (from 8.4% in July), once again beating the consensus forecasts. Istat reports that the main drivers of the acceleration were non-regulated energy goods (+41.6%, from +39.8% in July), food (+10.5% YoY, from 9.5% in July) and durable goods (+3.9% YoY, from +3.3% in July). The deceleration in fuel prices only softened the blow slightly. Core inflation, which excludes energy and fresh food, was also up to 4.4% from 4.1% in July, signalling that the pass-through of past energy price pressures is still ongoing. Tourism-linked re-opening effect still at work It is now clear that the set of fiscal measures (temporary tax cuts, caps on parts of the energy bill) put in place by the government has so far only managed to slow down the acceleration of headline inflation. The further gain in core inflation suggests that, at least until August, underlying demand conditions were deemed by businesses as good enough to withstand more pass-throughs. This indirectly supports our view that, over the summer, the tourism-linked re-opening effect was still at work in Italy. More government action expected Looking forward, in the short-term, the dynamics of inflation seem to still be strongly linked to the vagaries of energy and, more notably, gas prices. With energy inflation still firmly in the driving seat, we expect Italian political leaders to get louder in their call for more government compensation, and the government to bow within the current fiscal framework without resorting to extra deficit. Pressure on real disposable incomes remains extremely high, with contractual wage dynamics still hovering around 1% YoY. We expect price pressures to start softening over 4Q22 as the evaporation of the re-opening effect will give way to a consumption-driven recession which will negatively affect business pricing power. After today’s release, we revise up our forecast of average annual HICP inflation to 7.7%. Read this article on THINK TagsItaly Inflation Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more  

Italy goes to the polls on Sunday, with results expected through the course of the morning of Monday. Polls are showing a pretty strong lead for Brothers of Italy leader Meloni, so it's unlikely there will be a surprise with the electoral outcome. But, as far as the markets are concerned, a shift in the way Italy's finances are managed and how it relates to the Euro could have an impact on the shared currency. Who is likely to be PM is known, but who will be finance minister is another open question. While the three right-wing parties held a joint rally to close their election campaigns, the leaders put on a show of unity ahead of the polls. But there are still rifts between them, and some rather large egos that have already brought a previous government to a premature end. Negotiations for who will hold which ministers could end up showing the first cracks in the coalition. Possible implications Italy is the third largest economy in the Eurozone, but it's the largest in the so-called "periphery". Italy has had a contentious relationship with Brussels for years now, particularly over the issue of government finance and debt levels. The financial situation has only gotten worse since covid, and accelerated with the gas crisis. For now, the issue of how much money the Italian government is spending has been mostly ignored, but not forgotten. Particularly, apparently, among Italians who seem to be warming to the Euro-skeptic rhetoric of the lead candidate, Meloni. Italy has a debt-to-GDP ratio of 150%, nearly triple the Maastricht criteria. Italy's government deficit last year was 7.2%, well over double the 3% limit of the criteria. Italy's ability to service that debt is increasingly questionable as interest rates rise, particularly in the periphery. Meloni's confrontational attitude towards the EU is likely to further inflame tensions around the issue as well. Will the past repeat? The Euro entered a period of crisis in 2011 driven by a collapse in Greek debt payments. There was substantial worry that it would spread through other periphery countries, such as Spain and Italy. However, a rescue plan was cobbled together, some banks suffered, and the situation was barely averted. The Euro crisis included recessions and talk of a potential breakup of the shared currency. Read next: Cryptocurrency: Bitcoin Up, Ethereum Price Found Support, Ripple Price (XRP) Jumped! | FXMAG.COM Italy's economic situation is worse now than it was then. But not as bad as Greece was at the time. Greek debt lost investor confidence when it was revealed that authorities had misstated economic figures. And the debt-to-GDP ratio was 175%. Greece was not kicked out of the shared currency despite failing almost all the Maastricht criteria, which ultimately allowed more confidence in periphery countries' loose financials. On the other hand, it apparently also meant that the financial leaders of those countries felt they could get away with less fiscal discipline. To the point that even some Italian banks have not been provisioning as much as their American, UK and even German peers under the expectation that if the economic situation gets really bad, they will get a bailout. Just like in 2011. While Meloni might be able to convince voters to support her, getting investors to have confidence in Italy might be a whole different question. And by extension, investors might be worried that at least some of the problems from 2011 might appear again.

As largely expected, a centre-right coalition led by Giorgia Meloni has secured a clear victory in Italy's election. Meloni will now form a government which will count on a stable majority. For now, concerns about budget decisions and relationships with the EU are quite muted, and both Italian bonds and the euro have bigger short-term issues to deal with Giorgia Meloni secured a clear victory in Italy's election Centre-right got an ample majority in both branches of parliament For once, actual Italian election data broadly confirms what opinion polls had anticipated. According to preliminary data available as we write, the centre-right coalition has got an ample majority (44%), with the centre-left following some way behind (26%). The Five-Star Movement, which runs in isolation, has come third (15%), followed by the centrists of Azione/IV (7.7%). As expected, with the current electoral system attributing a third of seats under a first-past-the-post rule, the ability (or a lack thereof) to form a wide coalition was a decisive factor. The centre-right exploited it very well, mopping up an overwhelming majority of first-past-the-post seats. Based on preliminary data, the centre-right coalition should get a decent majority in both branches of the Parliament.  Meloni to get a mandate to form a government The undisputed big winner in this election was Giorgia Meloni, the leader of Fratelli d’Italia. With 26% of the votes, she prevailed in her coalition by a huge margin over Lega (9%) and Forza Italia (8%). There will be no leadership issue, and she will very likely get the mandate from President Sergio Mattarella to form a new government. This will not happen before mid-October, though, after the first gathering of the houses and the election of their speakers. A new Meloni government could thus be installed by the end of October. Italian election results Source: Italian Ministry of the Interior, ING A tight agenda awaits Meloni, with the budget at the top of the list The scope of Meloni’s lead within her coalition will likely give her the upper hand in many decisions, but we suspect she will be very careful not to humiliate her allies for the sake of stability. Still, on some crucial matters, such as the fiscal stance, she will likely be in a position to effectively oppose calls for more deficit from Matteo Salvini, the leader of Lega, who was a big loser in the polls. As the new budget will have to be approved before year-end, we expect the outgoing Mario Draghi government to set up the macro framework and, possibly, the Planning Document setting the budgetary framework. This should prevent any meaningful deviation from the set track in the short run. More critically, Meloni will over time have to clarify her stance on the international positioning of Italy. If adhesion to the Atlantic Pact seems not at stake, the relationship with Brussels and big eurozone countries will have to be clarified. If participation in the euro project is neatly reaffirmed in the programme, the notion of doing so while defending national interests has yet to be qualified. Not a very short-term issue, but a potential area of conflict for 2023, when the new European fiscal rules will be discussed.   Rates: too early to make long-term calls on policy Italian bonds largely shrugged off the goldilocks result of this weekend’s election: enough votes for the right-wing coalition to ensure stability but not too much so it can change the constitution with a two-thirds majority. Italian spreads tightened into the election in a sign that they have made peace with the prospect of an FdL-led government, for now at least. Focus is now on the early decisions that Meloni’s government will take, including the FinMin appointment, and on the 2023 budget. Longer term, this government’s policies, especially towards Brussels and fiscal discipline, are an unknown quantity. But markets aren’t well equipped to make long-term calls on policy, especially with contradictory near-term signals. Instead, the main driver of Italian bonds over the coming weeks and months is likely to be the broader tone in financial markets. In a context where central banks tighten monetary policy in unison, or even competing with each other in some instances, carry-oriented investors are understandably shy in picking up the additional yields offered by Italy’s bonds. The ECB’s newfound hawkishness is a particular worry, and so is the prospect of it reducing the size of its bonds portfolio through quantitative tightening. FX: Italy is not a short-term concern for the euro The Italian election results seem to have gone mostly unnoticed in the currency market. This is partly due to the predictability of the outcome, but may also denote how markets are giving Meloni the benefit of the doubt after a campaign where she firmly reiterated her intention to respect fiscal rules and maintain Italy’s foreign stance unchanged. Quite crucially, like for government bonds (BTPs), the euro has bigger concerns to deal with – Russia-Ukraine developments and the energy crisis above all – and is now also feeling some spill-over effect from the meltdown in the GBP market over the past two sessions. With the ECB’s hawkishness having blatantly failed to offer the euro any solid support and the dollar staying strong, EUR/USD downside risks remain quite elevated in the near term, even without Italian politics adding any pressure. We think that some Italy-EU confrontation on Meloni’s party's core themes (like immigration) may trigger some adverse market reaction further down the road, and that fiscal decisions may be scrutinised more if she presses forward with tax cut proposals, but it is simply too early for any risk premium to emerge on EUR/USD or even EUR/CHF.   Read this article on THINK TagsItaly elections Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

There has been a marked deterioration in confidence across most sectors of the Italian economy. In our view, a GDP contraction might just be avoided in the third quarter, but it is almost inevitable in the fourth  September confidence data points to a broad-based deterioration in the Italian economic picture Consumers are getting gloomy again Data from Italy's National Institute of Statistics (ISTAT) shows that in September, consumer confidence fell back to July’s level, which was the lowest level since May 2020 during the peak of the pandemic. Consumers are increasingly concerned about economic developments and expect a deterioration in household economic conditions. Combined with growing concerns about future unemployment, this translates into a reduced willingness to purchase durable goods. Further fall in manufacturing confidence Confidence in the manufacturing sector fell for the third consecutive month, recording the lowest level since February 2021, driven by weakening demand for consumer and intermediate goods, where orders fell for the third month in a row. The fall was much more contained in the investment goods sector, possibly reflecting the ongoing support of the European Recovery Fund. Production expectations fell markedly across the board, pointing to a further deterioration in industry’s supply-side push over the fourth quarter of 2022. Construction was the only sector to post a monthly gain, partially recouping August’s lost ground. The impact of generous tax incentives on building construction is clearly still at play, and firms’ rising employment expectations seem to reflect confidence that favourable conditions will remain in place. Services no longer a safe haven, as the re-opening effect fades away Today’s release seems to mark a break in developments in the service sector. After stabilising over the summer, confidence in the service sector fell abruptly in September, reaching the lowest level since February 2022. This involved all subsectors, suggesting that the re-opening effect, helped by revamped tourism flows, is fading away. This seems to be confirmed by the decline in retailer confidence. Read next: Tim Moe (Goldman Sachs) Comments On USD And Turbulent Times For Markets In General, Ole Hansen (Saxo)Talks Nord Stream | FXMAG.COM A GDP contraction in the fourth quarter looks inevitable All in all, September's confidence data points to a broad-based deterioration in the Italian economic picture. The jury is still out about whether the third quarter of this year will mark the start of a recession: we still believe that, notwithstanding a very likely manufacturing drag, services and construction might have managed to generate a minor GDP expansion. However, the combined effect of budget-constrained consumption and softer industrial production will make a GDP contraction in the fourth quarter almost unavoidable, marking the start of a technical recession. The new Italian government is set for a tricky start: in a no-growth environment, it will immediately have to craft a budget in which electoral promises will have to come to terms with evaporating fiscal space. Read this article on THINK TagsItaly GDP Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Volatile August production data should be taken with a pinch of salt as underlying developments continue to point to more accentuated weakness over 4Q22, when industry will very likely be confirmed as a drag on growth Car production line in Turin, Italy   According to Istat data, Italy's seasonally-adjusted industrial production increased a surprisingly strong 2.3% month-on-month in August (from an upwardly revised 0.5% in July). The working day adjusted measure posted a 2.9% year-on-year change (from -1.3% YoY in July). "August effect" possibly at play, in 3Q22 industry should remain a drag on GDP growth The broad aggregate breakdown shows that consumer and investment goods were the main drivers of the acceleration while the production of energy contracted. To be sure, this is a positive reading, but it should be taken with a pinch of salt, as the August release is often affected by marked volatility due to firm closures and their impact on seasonal adjustments. In order to get a sense of the underlying developments, we look at the moving quarter and note that over the June-August period, production contracted by 1.2% from the previous three months. Confidence and PMI data point to a deterioration in September While the August reading can still be partially interpreted as evidence that Italian industry continues to be relatively more resilient to international supply chain disruptions and to ballooning energy prices, we expect the picture to get gloomier over the coming months. The manufacturing PMI has been in contraction territory since July and business confidence plunged in September, with the expected production subcomponent down to levels not seen since November 2020. The set of measures recently put in place by the outgoing government to weather the energy inflation shock will help limit the damage for businesses but is unlikely to stop industry from becoming a drag on growth in both 3Q22 and 4Q22. The European Central Bank's tightening mode will not make things any easier over the next few months, possibly weighing on the investment component. A GDP contraction could still be avoided in 3Q22, not in 4Q22 After today’s reading we are mildly comforted in our view that the Italian economy might manage to avoid a contraction in 3Q22 (we expect a minor 0.1% GDP expansion) but remain convinced that this will not be possible in 4Q22, when we project a 0.5% quarter-on-quarter contraction, which should mark the start of a recession. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

After passing the confidence vote in both branches of parliament, the Meloni government is now fully empowered. We expect a prudent approach to the budget, and a bias towards cheap but visible measures which should help to contain political risk The Meloni government is fully empowered after passing confidence votes in both branches of government Meloni government easily passed both confidence votes After passing a confidence vote at the Lower House yesterday (235 votes in favour out of 400), today the Meloni government got the rubber stamp also from the Senate (115 votes in favour out of 206), and is now fully empowered. Meloni keen to reassure on Atlantic alliance and relationship with European institutions In her parliamentary address before the confidence votes, PM Meloni had broadly outlined the programme for the legislature. She sounded aware of the scope of short-run challenges and is very keen to reassure her enlarged audience about the international positioning of Italy and the relationship with European institutions. On the first, she re-affirmed that under her leadership Italy will remain well anchored into the Atlantic alliance, unambiguously supporting Ukraine. On European integration, she clarified that the promised defence of national interests will be met by acting “from within”, in an attempt to better steer the process when facing crises and external threats. The absence of any reference to Italexit options of sort is clearly reassuring, but the way this strategy will be implemented is still unclear. Prudent approach on economic matters, for the time being When dealing with economic matters, Meloni adopted a relatively prudent approach, acknowledging that in the current deteriorating economic environment the short-term priority will be to refinance the set of measures to help households and businesses weather the energy price shock (energy bills, temporary reduction of fuel tax). As this will likely use up most available resources, she added that some planned measures (tax wedge cuts and extension of the flat tax) will only gradually be introduced. We thus suspect that the government will set up a priority list topped by those measures bearing a small monetary cost tag but high symbolic value. The proposal by Salvini to raise the limit for cash transactions to €10K seems to point in this direction. The replacement of the expiring early pension scheme (the so-called level 102) will also likely be high in the priority list, as inaction on the subject would bear a high political cost. Frictions among coalition to remain under control in the short run After some frictions with junior ally Forza Italia when the list of ministers was compiled, tensions within the government alliance have seemingly cooled down. Furthermore, the appointment of Giancarlo Giorgetti, an experienced moderate politician from the Lega, in the key role of finance minister should in principle reduce in perspective the risk of political instability coming from the benches of the Lega. 2023 budget and RRF implementation as forced priorities All in all, we remain convinced that in the short run PM Meloni will have very limited room to manoeuvre on the economic front, with priorities mainly set by external constraints (energy inflation) and by the need to implement the Recovery and Resilience facility measures to contrast the incoming recession. Read this article on THINK TagsItaly elections Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Italian consumers are feeling the pain of increasingly squeezed disposable income, and businesses worry that less demand - an increasingly important factor - is going to weigh on production Consumers in Italy are becoming increasingly pessimistic. Pictured: shoppers in Lazio Broad-based confidence decline in October points to contraction Early evidence is pointing to a contraction in Italy's economy in the fourth quarter. Today's consumer confidence data for October shows falls in all business sectors except services, taking it to the lowest level since March 2013. It has to be said that the jury's still out as to whether the Italian economy managed to avoid a contraction in the third quarter; we'll get the flash estimates for that on Monday.  The five-point fall in consumer confidence was driven by a steep decline in the difficulties people have in purchasing durable goods and saving for the future. The prospect of unemployment is also a big concern as is a general worry about current economic conditions. The re-opening effect after Covid lockdowns, which helped consumption over the first half of the year and part of the summer, is now coming to an end as confirmed by the steep fall of confidence among tourism businesses. The ongoing compression in real disposable income is the most obvious macro driver. As price expectations among businesses continue to point higher (with the exception of manufacturers) the real disposable income effect looks set to remain in place, barring unlikely generous wage concessions. Admittedly, firms are not showing clear intentions to shed workers right now and employment should continue acting as something of a shock absorber, at least in the short term.  Manufacturers increasingly point to insufficient demand The further decline in manufacturing business confidence is hardly surprising. Interestingly, manufacturers' responses are signalling that demand constraints are again at play. Orders, and particularly the domestic component, are slowing down, stocks of finished products are increasing and the level of current production is declining. For the first time since the first quarter of 2021, insufficient demand is perceived as a stronger obstacle to production than the availability of plants and materials, typical supply factors. This means that a further easing of existing supply constraints in global value chains might not automatically translate into higher production in a deteriorating demand environment. In the manufacturing domain, producers of investment goods seem to be faring better, suggesting that the demand flow originated by the implementation of the recovery and resilience facility is still playing out. GDP contraction in the last quarter seems inevitable Today’s confidence data suggest that an economic contraction in the fourth quarter of this year will be almost impossible to avoid. On the demand side, this will be driven by the evaporation of the re-opening effect (often related to tourism) and by the compression of real disposable income, which will likely translate into softer consumption. From the supply side angle, both industry and services now look likely to act as a growth drag in the quarter.   We are pencilling in a 0.5% GDP contraction in 4Q22, with average GDP growth of 3.4% for the full year.   Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

We suspect that a combination of post-Covid re-opening and tourism effects was at play, possibly with the support of investments. We still expect a short recession to start in 4Q22 A good recovery in domestic and international tourism helped boost Italy's second-quarter GDP Italian economy decelerating, but well clear of contraction in 3Q22 The flash estimate just released by Istat shows that Italy managed to avoid contraction in 3Q22. We had expected a positive reading, but the 0.5% QoQ gain (was 1.1% QoQ in 2Q) is clearly a positive surprise. The 2.6% YoY gain (was 4.7% in 2Q22) marks a clear deceleration, which looks set to continue ever the next few quarters. As usual at the preliminary estimate stage, no detailed demand breakdown was released but the indication is that domestic demand (gross of inventories) provided a positive contribution to quarterly growth, while net exports acted as a drag. On the supply side, value added contracted over the quarter in agriculture and industry and increased in services. The tail effects of re-opening and positive tourism numbers likely the main drivers Today’s release confirms our belief that the re-opening effect and a very positive tourism season were still powerful growth drivers in the third quarter of 2022. We suspect that detailed demand data will eventually show positive contributions from both consumption and, possibly, investments, the latter helped by the support of European recovery funds and generous domestic tax investments in the construction domain. A contraction in 4Q22 still looks hard to avoid Looking forward, we remain convinced that a GDP contraction is hard to avoid in 4Q22, opening a short-lived recession which looks set to end by 2Q23 . Confidence data headed further south in October, including in the tourism sector. Households are gloomier as disposable incomes are increasingly eroded by accelerating inflation and with a backdrop of slowly growing wages. The new government will likely prioritize a new wave of compensatory measures, but these will mostly refinance expiring ones and so limit damage rather than inducing a turnaround. Statistical carryover for 2022 GDP growth is now at 3.6%. Taking into account the 0.5% contraction that we are currently penciling in for 4Q22, we would end up with average GDP growth of 3.5% in 2022. Keeping our previous profile for 2023 unaltered, we now look for average GDP growth of 0.2% in 2023. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In Italy, business and consumer confidence rebounded in November. The scope of the rebound comes as a surprise, given the high inflation and geopolitical backdrop. This suggests that the GDP contraction, which we still pencil in for the fourth quarter, might be very small Giorgia Meloni, the new prime minister of Italy, has boosted consumer confidence by announcing continued energy support for households     November confidence data marks a widespread improvement both among consumers and businesses, interrupting a decline that started in July. We remain extremely cautious in interpreting the November reading as a sign of reversal, but it shows that the deceleration brought about mostly by the impact of higher inflation might turn out – for the time being – to be a soft one. Consumer confidence gained eight points in November, reaching back to August levels. Interestingly, the main driver of the rebound was a big improvement in the future climate component. Consumers seem to expect an improvement in Italy’s economic conditions, with a positive bearing on future unemployment. Looking at the current environment, with inflation still on the increase and subdued wage dynamics, it is not easy to justify such a reversal. A possible explanation could be post-election relief, as the new Meloni government has announced its continued support to households to compensate for the negative consequences of the energy shock on disposable income. In the business domain, the scope of the rebound in confidence has been widespread, with the exception of construction, where confidence continued its downward trend from historic highs. As with consumers, there seems to be a clear distinction between the present state of business and expectations about it. Taking manufacturers as an example, they see orders deteriorating and highlight an increase in stocks of finished goods, implicitly signalling soft current demand, but at the same time signalling a strong increase in expected production. When looking at services, what stands out is the driving role of tourism. After declining sharply in both September and October, confidence in the tourism sector has rebounded strongly, reaching back to August levels. Interestingly, the improvement is propelled by both current and expected orders, which both post similar substantial gains. On the back of previous confidence data we had anticipated the disappearance of tourism over the fourth quarter; November data seems to suggest that inertia in the sector is strong and that the expected drag on growth might consequently be smaller. All in all, notwithstanding today’s surprisingly strong confidence data, we do not believe an economic turnaround is in the making, as yet. The negative impact of inflation remains in place both for consumers and businesses and we suspect that the refinanced compensation measures will not be enough to prevent a GDP contraction in the fourth quarter of this year. But this will likely be a very small contraction, adding upside risks to our current forecast of a 3.6% GDP growth in 2022.    TagsItaly   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Headline inflation in Italy stabilised in November, still very much driven by goods, with the energy component starting to reflect an improving base effect. Beware core inflation, though, as its persistence will likely slow down the decline in headline inflation over the first part of 2023 Consumer headline inflation came in at 11.8% year-on-year in November, unchanged from October, and in line with our forecasts. This results from a decline in the non-regulated energy component, of fresh food and transport services, and an acceleration of regulated energy goods, transformed food, other goods and recreational and cultural services. The wide gap between goods inflation (at 17.5% YoY) and services inflation (at 3.8% YoY) remains stable from October. The harmonised HICP measure was also stable at 12.5% YoY. Favourable base effects in energy, but the core measure continues to inch up We are at a time of the year when the base effect starts to be favourable. This was the case with aggregated energy goods, where inflation declined to 67.3% in November from 71.1% in October. However, this is not the case with underlying inflation, which accelerated to 5.7% (from 5.3% in October) signalling that the pass-through of past energy inflation pressures is not over yet. As wage dynamics have so far remained almost unaffected (1.2% YoY in September is the latest reading), risks of further gains in the core component over the next few months should not be dismissed. Peak possibly close, but pace of decline still uncertain Looking ahead, we suspect that the energy component might have reached its peak, but will remain exposed to the vagaries of administrative decisions. For instance, the current €0.30 rebate on fuels will be reduced to €0.18 from December, which will have an impact on the headline measure. More encouragingly, in October producer price inflation recorded a clear deceleration to 28% YoY from 41.7% in September, suggesting that price pressures in the pipeline started to finally cool down. November business surveys seem to confirm this, with the selling price component (over the next three months) declining both in manufacturing and services. This does not mean that the headline peak has now passed. We currently project inflation to remain at the current level into December, and to start a gradual decline thereafter as the deceleration in the energy component should outweigh the inertia in the core measure. For the time being, we are sticking with our average yearly inflation forecast at 8.2% in 2022 and 6.7% in 2023.   Read this article on THINK TagsItaly Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The last batch of confidence data for 2022 points to extra resilience in fourth quarter GDP. We are still pencilling in a small contraction, but a flat reading cannot be ruled out Source: Shutterstock The latest batch of confidence data for 2022 shows that both consumer and business sentiment has improved, with the sole exception of manufacturers. Consumers more upbeat and less concerned by future unemployment The consumer confidence index posted the second consecutive substantial improvement in December, reaching back to the level seen in May. The drivers of the four-point gain were sharp increases in the economic conditions and future climate components, reflected in a clear improvement in unemployment expectations. In our view, two factors can explain the surprisingly strong resilience of consumer spirits, irrespective of the ongoing erosion of real disposable incomes caused by the inflation spike. The first is a favourable development in the labour market, with an improving employment rate and a falling unemployment rate. Whilst a possible side effect of demand/supply mismatch and of unfavourable demographic developments, these are nonetheless positive short-term factors. The second is the fact that the Meloni government has prioritised providing continuous fiscal support to households to weather the energy inflation shock, refinancing most of the measures until the end of March 2023 in the budget. Interestingly, for the second month in a row, consumers express an increasing willingness to purchase durable goods. Manufacturers confirm they're not immune to external developments The business front looks more diversified, with manufacturers more pessimistic and builders, retailers, and, importantly, service providers, more upbeat. The fall in manufacturing confidence, more pronounced among producers of investment and consumer goods, reflects softening orders and increasing stocks of finished goods, consistently mirrored in declining production plans. Italian industry, still outperforming its big eurozone peers, is apparently not immune to recent unfavourable developments in global trade nor to growing uncertainty about the risk of renewed supply chain issues related to Covid developments in China. Services likely benefiting from stronger-than-expected reopening effects Perhaps the biggest surprise comes from the fourth consecutive confidence improvement in the service sector, notwithstanding an expected setback in the tourism component. The reopening effect seems to be lasting longer than expected, with a possible bearing on 4Q22 GDP developments.   Still pencilling in a negative 4Q22 GDP change, but a flat reading cannot be excluded All in all, the end-of-year confidence data release adds upside risks to 4Q22 GDP developments. We continue to believe that manufacturing will confirm a supply-side growth drag in the quarter, but acknowledge the risk that services might fare better than expected. The demand side counterpart might have a smaller negative correction in consumption than previously anticipated. We are currently pencilling in a 0.2% quarter-on-quarter GDP contraction in 4Q22, but a flat reading could be a distinct possibility.      Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Despite solid employment resilience, consumption looks set to decelerate in 2023. Still, together with investment, it should keep growth in positive territory In this article Gradual inflation decline, with energy fall prevailing over core stickiness Resilient employment should help limit the damage Investment still growing Fiscal discipline: a valuable political capital for upcoming negotiations   Shutterstock Giancarlo Giorgetti, Italian Minister for Finance   The jury is still out as to whether the Italian economy contracted in the fourth quarter of 2022, and we currently expect to see a minor -0.1% quarter-on-quarter fall in GDP. This year will likely see a soft start, followed by a gradual recovery over the rest of the year. The growth profile will be hugely affected by developments on the inflation front and their impact on both disposable income and domestic demand. Gradual inflation decline, with energy fall prevailing over core stickiness The sharp decline in TTF natural gas prices seen over the past month (falling 60% to around 60€/MWh) should have a positive impact on the energy component of the inflation basket, creating room for positive base effects on headline inflation to unfold over the first months of 2023. The pass-through of energy price pressures is not over yet and will likely weigh on core inflation for some time. Signals from the business sector point to a decline in intentions to hike prices among manufacturers but not yet in services, suggesting that some form of reopening-induced consumption is still at work. Over the first half of the year, we expect the drop in energy inflation to outweigh the inertia in the core inflation component. This should induce a gradual decline in the headline index, which is expected to end the year above 2.5% year-on-year. Resilient employment should help limit the damage Stubborn inflation is weighing on disposable income, but the effect is less noticeable than we had expected. In the third quarter of last year, real disposable income increased by 0.3% quarter-on-quarter despite accelerating inflation, mainly thanks to surprisingly strong labour market data. In November, against a backdrop of an economic slowdown, employment confirmed its peak at pre-pandemic levels. The unemployment rate, admittedly a backwards-looking indicator, was stuck at a multi-year low of 7.8%. High gas storage levels, which were just below 80% full by mid-January and resulted from unusually mild weather, further reduced the chance of energy rationing this winter and limited the scope for short-term supply shocks. Still, with a modest deterioration in employment and shrinking room for substantial declines in the saving ratio (which fell to 7.1% in 3Q22, the lowest level since 4Q12 and below the pre-Covid average), we anticipate consumption will cool down over the 4Q22-1Q23 period. We then see it picking up at a moderate pace so long as inflation recedes. A short-lived and soft technical recession in the first quarter of 2023 remains our base case, but short-term upside risks are rising. Unusually high gas storage levels make energy rationing unlikely this winter AGSI+, ING Research Investment still growing Private investment should also, in principle, remain a positive growth driver in 2023. This will build on two factors: a residual drive of residential construction investment fuelled by tax incentives, and the flow of new investments linked to the implementation of the national recovery and resilience plan (RRP). Both are exposed to downside risks, though. If residential construction suffers from the impact of rising interest rates, risks to the RRP front could emerge as the balance between reforms and investments shifts towards the latter. Further adding to the issue could be involvement from local administrations, which are less equipped to manage complex projects. Fiscal discipline: a valuable political capital for upcoming negotiations The macro backdrop described above will fit into a prudent fiscal framework. The Meloni government crafted its 2023 budget with a piecemeal approach, in continuity with the Draghi government. Almost two-thirds of the €34bn budget is devoted to refinancing deficit measures designed to support (until 31 March 2023) households and businesses weathering the inflation shock. The rest is dispersed among other measures, ranging from refinancing the cut to the tax wedge (again, in continuity with the Draghi government) to extending a flat tax system for independent workers. The government aims at a 4.8% deficit/GDP target for 2023, which implies a 1.1% reduction in the structural deficit. Fiscal discipline will be a valuable political capital to be spent in upcoming negotiations on reforming the stability and growth pact. In our view, risks to this for 2023 lie on the side of a slightly higher deficit but not enough to jeopardise another decline in the debt/GDP ratio. For the second year in a row, the inflation effect (through the GDP deflator) is set to work its magic on the debt ratio.   The Italian economy in a nutshell (%YoY) Thomson Reuters, all forecasts ING estimates TagsItaly GDP Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more  

Unsurprisingly, domestic demand was the driver of this minor contraction. A short technical recession might ensue now, but a gradual recovery is expected to follow in the second quarter The small contraction in fourth quarter GDP might mark the start of a very short minor technical recession in Italy Minor contraction driven by domestic demand softness The Italian seasonally-adjusted GDP posted a minor 0.1% contraction in the fourth quarter of last year (from +0.5% in the third quarter), in line with our forecast, and a 1.7% increase in year-on-year terms. No detailed demand breakdown was disclosed, but the Italian National Institute of Statistics (Istat) indicated that the GDP contraction was the result of a positive contribution of net exports and a negative contribution of domestic demand (gross of inventories). The supply-side angle shows an increase in value added in services and a contraction in both agriculture and industry. The average 2002 GDP growth was 3.9% (compared to 6.6% in 2021). Lacking a detailed demand breakdown, we suspect that softer private consumption resulting from the fading out of the re-opening effect was the main drag on quarterly growth, while the support coming from net exports should be the result of a sharp contraction of imports rather than healthy exports. A short technical recession over the winter is likely, but the labour market will remain supportive The small contraction in fourth quarter GDP might mark the start of a very short minor technical recession, which we expect to end in the third quarter of this year. The first quarter of 2023 will likely see the economy still suffering the effects of the inflation wave on private consumption through the disposable income channel. However, as in 2022, a resilient labour market will likely act as an effective shock absorber for households, providing partial compensation. As December employment data have shown earlier today, the labour market is still solid, with a monthly employment gain and an increase in unemployment resulting in a stable unemployment rate of 7.8%, thanks to a decline in the pool of inactive workers. Interestingly, January business surveys signalled that hiring intentions are expected to remain in place over the next three months, both in industry and in services. On the investment front, continuous support should come from the European recovery fund effect. We thus anticipate another minor GDP contraction in the first quarter of 2023. Read next: The Government Pension Fund Global Suffers Losses| FXMAG.COM The recovery which will follow will likely be gradual All in all, today’s small negative reading should not be overemphasised. Whether it will be a technical recession or not, what the Italian economy is experiencing is a form of temporary stagnation. The exit speed will likely depend heavily on how fast the inflationary wave will recede. As we believe that the combination of energy inflation decline and core inflation stubbornness will yield a gradual fall in headline inflation, we expect the recovery to be very gradual as well. The carryover effect of 4Q22 GDP data on 2023 GDP growth is 0.4%. We forecast that the actual number will be slightly better than that at 0.7%. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Today's release shows a divergence between the headline and core measures, which could continue for a few months. This pattern is unlikely to revive consumption, for the time being, but might start affecting supply Italian inflation decelerated in January, mainly on lower energy prices Regulated energy prices push down headline inflation The headline inflation peak should now be behind us. According to the preliminary estimate, headline inflation declined in January to 10.1% year-on-year (from 11.6% in December), in line with expectations. Unsurprisingly, the inflation decline was mainly driven by the sharp fall in regulated energy goods inflation (down to -10% YoY from +70.2% YoY), but also non-regulated energy goods, fresh food and recreational services contributed marginally to cool down headline inflation. The expiration of excise cuts on fuels had the expected upwards effect on transport inflation. The core measure inches up again at a non-accelerating pace However, the most interesting part of the release, from the European Central Bank perspective, was the core inflation part. The core measure inched up once again to 6.0% (from 5.8% in December), signalling that the pass-through of past energy price pressures is yet in place, albeit at a non-accelerating pace. This might continue for a few months more, but if energy prices continue to be well-behaved, chances are that the peak in core inflation might be reached by mid-year. The pattern should continue if gas prices remain well-behaved Looking ahead, we expect the divergence between headline and core inflation to continue in February, once again courtesy of the energy-related component. With TTF gas prices now hovering in the 60 €/MWh area, we expect retail gas prices to fall markedly in the month. The expected modest increase in the core measure should not prevent headline inflation from decelerating to the 9%+ area in February. Read next: USD/JPY Pair Drop Below 130.00, GBP/USD Is Trading Below 1.2330, The Australian Dollar Remains Generally Up| FXMAG.COM No short-term positive impact on consumption expected All in all, the inflation picture seems to follow the expected profile. Notwithstanding the headline deceleration, the stubbornness in the core measure remains an issue for short-term growth developments. True, resilience in employment represents a crucial safety net for households, but with contractual hourly wages increasing at a very modest 1.5% yearly pace, it can only limit damages on real disposable incomes. For the time being, consumption looks set to remain under pressure. Interesting signals on the supply front worth monitoring Where the energy deceleration might have a more immediate positive effect is on manufacturing, and particularly on energy-intensive sectors. The PMI indicator for January, also released earlier today, was back in expansion territory at 50.4, interrupting a six-month run of sub-50 readings. This is a tentative indication that something might happen on the supply side front already in the first quarter. Read this article on THINK TagsItaly inflation Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Industry may have been less of a drag on fourth-quarter GDP growth than expected. Positive signals from confidence data in January warrant some optimism, but do not clear the way for a substantial short-term acceleration, given the uncertain external environment Source: Shutterstock Production rebounds, not in energy-intensive sectors In December, industrial production rebounded an unexpectedly strong 1.6% in seasonally-adjusted terms, after three consecutive monthly declines. Production expanded on the month in all of the large aggregate categories, but more markedly in capital goods and energy. The sector breakdown shows that the ongoing improvements in the functioning of supply chains had a positive effect on transport equipment. However, energy-intensive producers of chemicals, plastics and tiles, paper, and metals and metal products continued to suffer, signalling that the impact of the energy shock was still weighing on supply by the turn of the year.   The consequences of the energy crisis weighed heavily on industry in 2022 During 2022 as a whole, industrial production posted a 0.5% increase, driven by consumer and capital goods. Almost inevitably, the consequences of the war in Ukraine on energy prices weighed heavily on the manufacturing sector over the year. The measures put in place by the government provided only partial compensation and manufacturing acted as a drag on economic growth. This put the onus on services to fuel growth. Confidence improvement encouraging, but short-term acceleration unlikely With the December release now in the bag, we now know that the statistical carryover for 2023's industrial production is a modest 0.3%. Business confidence data published after the turn of the year was positive but did not dispel uncertainty. While the PMI entered expansion territory, orders remained soft and the stock of finished goods is relatively high, suggesting that a substantial acceleration in production is unlikely, at least in the short run. To be sure, the consolidation of wholesale gas prices at current levels could help to support businesses, particularly in energy-intensive sectors.  Read next: Tesla Will Increase Output For 2023, Deliveroo Are Planning To Cut Jobs| FXMAG.COM Today’s release does not change the picture for GDP growth in 2023. We are currently forecasting average GDP growth at 0.7% in Italy, with a minor 0.1% quarterly contraction in the first quarter. Should early positive signals be confirmed, a flat or mildly positive first quarter could easily materialise. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Headline inflation in Italy fell in February, but core inflation continues to accelerate  Headline inflation decelerates to 9.3%, driven by energy According to preliminary data from the Italian National Institute of Statistics, headline inflation for February came in at 9.3% (from 10% in January) and the harmonised measure at 9.9% (from 10.7% in January), in line with our forecasts, confirming that the disinflationary process is still in place. At the heart of the deceleration in the headline measure was, as in January, the energy component (both regulated and non-regulated), which more than compensated for increasing price pressures in food, tobacco and recreation and transport services. The decision to update retail gas price bills on a monthly basis (previously it was done on a quarterly basis) has made the transmission of wholesale market developments faster than in the past. February data reflected the decline in wholesale gas prices, the key parameter for determining monthly gas price dynamics. Core inflation accelerates, showing that pass-through is still in place Crucially, core inflation, which excludes energy and fresh food, inched up at an accelerating pace, reaching 6.4% (from 6% in January). Clearly, the pass-through of past energy price pressures has not finished, and some core inflation stickiness seems highly likely. The acceleration in services inflation suggests that transmission has still some way to go. With wage inflation also still very low – in the 1.5% area – and a relatively tight labour market in January, it seems reasonable to expect that upward adjustments over the next few months will also put upward pressures on costs. Read next: Tesla Intends To Cut Assembly Costs, The White House Released The National Cyber Strategy | FXMAG.COM An inflation shift from goods to services Looking ahead, we believe that the divergence between decelerating headline inflation and stickiness in core inflation will persist over the first half of the year. The energy disinflation looks set to continue in March, when the last leg of the decline in gas prices will show up in monthly bills, and in April when the quarterly adjustment of electricity prices will also incorporate lower generation costs. At the same time, the pass-through will likely continue, particularly in the service sectors. February business surveys showed a deceleration in surcharges on output prices in the industrial domain, but there have been no signals as of yet of a deceleration in services. The shift in the consumption pattern towards services is also possibly supporting such a pricing pattern.   All in all, today’s release holds few surprises. The disinflationary process continues, but the peak in core reflation is not yet in sight. Italian inflation does not offer the European Central Bank any reason to change its monetary tightening plans. Read this article on THINK TagsItaly inflation Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Italian GDP contracted by 0.1% quarter-on-quarter in the final quarter of 2022. We now tentatively anticipate flat growth in 1Q23 Galleria Vittorio Emanuele II in Milan is Italy's oldest active shopping gallery   Revised data confirms that in the fourth quarter of last year, Italian GDP contracted by 0.1% quarter-on-quarter (from +0.4% in the third quarter of the year) in seasonally adjusted terms. On the year, GDP expanded 1.4% (from +2.5% in 3Q22), confirming the ongoing deceleration. Private consumption and de-stocking at the heart of the contraction Today’s data add useful information on the demand breakdown. The change in inventories (-1.1% quarterly contribution) and private consumption (-0.9% contribution) acted as a drag, and the positive contribution of gross fixed capital formation (+0.4% contribution) and net exports (+1.4%) did not fully compensate.    We had expected that the combined effect of rising inflation and flat wage growth would have ultimately eaten into real disposable income, resulting in softer consumption. This was indeed the case, notwithstanding compensating measures put in place by the government. We noted that in 3Q22, households’ saving ratio had fallen heavily to 7.1% (below the medium-term average), signalling that consumption smoothing had already encouraged households to tap into their savings pool; this was apparently not replicated in the fourth quarter of 2022, when households preferred to adjust consumption.  Read next: NAGA analyst on Eurozone inflation: This is likely to trigger a more restrictive monetary policy from the ECB for two reasons | FXMAG.COM Investments and net exports counterbalanced We had also anticipated that investment would have held up on the back of the combined effect of inflowing EU Recovery funds and domestic tax incentives in the construction sector: data show that transport equipment also helped push quarterly growth. The scope of the positive net contribution of net exports, underpinned by a strong increase in exports and an even stronger contraction in imports, came as a surprise. Improving confidence data point to a flat first quarter Looking ahead, the impact of the start of a disinflationary process after the November 2022 peak should slowly improve the growth picture. As far as the current quarter is concerned, the only bit of hard evidence available is January labour market data, which confirmed a resilience of employment in the month. Confidence data, whose explanatory power for GDP developments has declined of late, have also improved in manufacturing, which had suffered the negative impact of supply chain disruptions. We acknowledge that in the second quarter of this year, industry might again become a supply-side growth driver, but we prefer to remain prudent on the scope of growth developments as we believe the ongoing monetary policy tightening has yet to display its full effect on domestic demand. We now tentatively anticipate flat growth in 1Q23 and average GDP growth in 2023 of 0.7%.         Read this article on THINK TagsItaly GDP Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The worse-than-expected January release and business confidence data suggest that a clear turnaround in manufacturing activity won't materialise in the first quarter of 2023   The surprisingly strong 1.2% monthly expansion of industrial production recorded in December 2022 did not continue in January, which saw a worse-than-expected 0.7% contraction. The working day adjusted measure is up 1.4% on the year, providing only partial comfort.   The sector breakdown does not provide strong directional indications but shows that energy-intensive sectors such as chemicals and metal products performed better than others, possibly reflecting the positive impact of falling energy prices. There were no clear indications from sectors more heavily hit by past supply chain disruptions, where production contracted in transport equipment and expanded in electronics. Looking ahead, we don’t expect an imminent substantial acceleration in production. In February, manufacturing confidence was stable on the month, with production and the order subcomponents improving only marginally. The consolidation of gas prices at relatively low levels should in principle continue to help energy-intensive sectors, but at the same time the impact of past interest rate hikes should be increasingly visible on demand. Indications coming from the finished goods inventory component of February’s business confidence survey look still inconclusive. There is no generalised strong need to re-stock for the time being, but a timid indication that some re-stocking could be more likely in investment goods than in consumer goods.  Today’s release seems to suggest that the Italian economy will flirt with a technical recession in the first quarter of 2023. We are currently pencilling in flat GDP growth in the first quarter, and expect a very gradual recovery over the rest of the year, with average GDP growth at 0.7% in 2023.   Read this article on THINK TagsItaly industrial production Italy GDP Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The improvement in confidence points to a positive GDP reading in the first quarter, but is no guarantee of a strong acceleration thereafter, when the impact of cumulated rate hikes will bite The post-Covid re-opening effect is not over yet in Italy   After contracting by 0.1% quarter-on-quarter in the fourth quarter of 2022, the Italian economy might avoid a temporary technical recession in the first quarter of 2023. Today’s release of March confidence data, of both consumers and businesses, provides additional tentative evidence of a broad-based improvement in the economic sentiment, possibly due to falling gas prices. Consumers less worried by unemployment but see less room to save Consumer confidence increased for the second consecutive month, almost closing the gap with pre-pandemic levels. Households are more confident about the current economic situation and its future evolution, and are consistently less worried about future unemployment, but are less convinced about current and prospective possibilities to save. Our reading is that employment resilience is helping to support income generation, but that the ongoing inflation wave, where the core measure is still increasing, continues to impact real disposable income negatively. Under pressure, households might still be forced to cut savings to smooth consumption. Manufacturers surprisingly more upbeat On the business front, the main surprise comes from the manufacturing sector, where confidence posted an unexpected gain. Here orders saw a small improvement, but it was the expected production component which posted the most relevant gain for the month. Sector-wise, the monthly improvement is due to the consumer goods domain, with confidence stable in intermediate goods and slightly declining in investment goods. The rebound in construction confidence is mainly due to a gain in the residential component, which is still benefiting from the tailwind of very generous tax incentives, whose future expiration is putting pressure on specialised labour demand. On the services front, the improvement in headline confidence is mainly driven by the tourism component, where current and expected orders posted substantial monthly gains. The post-Covid re-opening effect is apparently not over yet. Marginally positive GDP growth in the first quarter is our new base case All in all, the main takeaway from today’s confidence data is that the Italian economy is proving more resilient than originally expected. Consumers remain under pressure, but a resilient labour market and a tentative acceleration in hourly wage dynamic is likely helping to weather the inflation storm. Construction investment is still supported by tax incentives, while the manufacturing picture is less clearcut, being more exposed to developments in the external environment. We now believe that the Italian economy will manage to post a minor positive quarterly improvement in the first quarter of the year. With the impact of past monetary tightening yet to hit the economy, economic developments over the rest of the year remain uncertain, though, with limited scope for substantial accelerations. Having said that, our current forecast of a 0.7% average GDP growth for 2023 is now subject to upside risks.           Read this article on THINK TagsItaly GDP Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Headline inflation in Italy came in at 7.7% in March, down from 9.1% in February. The disinflationary process is still in place and is mainly driven by the energy component Energy disinflation is set to continue in April Headline inflation decelerates to 7.7%, driven by energy According to preliminary data from the Italian National Institute of Statistics, headline inflation came in at 7.7% in March (from 9.1% in February) and the harmonised measure at 8.2% (from 9.8% in January), which was lower than expected. The disinflationary process is still in place and is mainly driven by the energy components which more than compensated for increasing price pressures in unprocessed food, tobacco and recreational services. Interestingly, non-durable goods and processed food inflation seem to be topping. Apparently, the monthly billing of gas (done quarterly) is helping to accelerate the pass-through of sharp declines in wholesale gas prices (now hovering around €42MWh) to the retail energy component. Core inflation is still up, but decelerating Core inflation, which excludes energy and fresh food, inched up slowly in March, reaching 6.4% (from a revised 6.3% in February). The pass-through of past energy price pressures has not been completed yet, and some core inflation stickiness remains. The ongoing acceleration in services inflation suggests that transmission has still some way to go. Energy disinflation set to continue... Looking ahead, we believe that the gap between decelerating headline inflation and relatively sticky core inflation will close over the second quarter. Energy disinflation will likely continue in April due to the electricity price component. Arera, the Italian energy regulator, announced yesterday that the regulated electricity price will fall next month by 55% compared to the previous quarter. The fall in the energy component will more than compensate for the inflationary impact coming from the end of temporary cuts in the VAT rate. As the new tariff will apply throughout the second quarter, the net effect should thus contribute to further pushing down the energy component in May and June as well. ...and the gap between headline and core inflation could close soon In the meantime, stubborn core inflation is unlikely to cool down, at least in the very short term. The pass-through of the energy price shock looks set to continue, particularly in the service sectors. March business surveys showed a deceleration in surcharges intentions on output prices in the industrial domain, but there are no signs of deceleration as yet in services. Read next: Eurozone inflation drops as expected but core continues to rise| FXMAG.COM The ongoing deceleration in industrial producer prices (in February they came in at 9.6% year-on-year, the first single-digit reading since July 2021) suggests that non-energy goods inflation will soon decelerate, taking some heat off core price dynamics. On balance, we might not be far from an inversion in core inflation as well, but wage developments might delay it a bit. With employment at record-high levels and the vacancy ratio hovering at its historical high, wage dynamics might still add some momentum to core inflation. Indeed, contractual hourly wages came in at 2.2% YoY in February, and look set to creep up further.   All in all, today’s release confirms that the disinflationary process is ongoing, still driven by the energy component. The peak in core inflation has not been reached yet, but could not be far away. The chance of a sub-6% average 2023 inflation reading has now clearly increased. Read this article on THINK TagsItaly inflation Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

February's industrial production figures confirm a soft start to 2023, notwithstanding improved supply chains and lower gas prices – which only marginally improve the picture in the very short run Another small contraction in February's industrial production After contracting by 0.5% in January, the seasonally adjusted Italian industrial production index posted another small 0.2% decline in February. The 0.7% monthly contraction in manufacturing was only partially compensated by the 2% gain in energy. The working day adjusted measure was down 2.3% on the year.  Sector breakdown points to limited gains from improved supply chains Improving supply chains and declining gas prices were not enough to bring about solid supply-side gains, possibly reflecting a combination of soft-ish demand and decently filled stocks of finished goods. This seems to be confirmed by the sector breakdown, where energy-intensive sectors such as plastics and chemical products only managed to post small monthly production gains and supply-chain sensitive sectors such as transport equipment and electronics were flat and in contraction, respectively. Gap between business confidence and hard production data yet to be filled Today’s release confirms that the gap between improving manufacturing confidence indicators has so far failed to translate into better hard production data. As order books have only timidly started to improve, we believe that the current flattish production pattern will continue for another few months, limitedly propelled by improving supply conditions. If this is confirmed, industry could fail to provide a positive push to GDP in the first quarter, leaving the onus of growth on services, still driven by a long-lasting re-opening effect and by a re-composition of the consumption pattern away from goods and toward services. Read next: Eurozone industry shows strong production growth in February| FXMAG.COM We are currently pencilling in a 0.1% quarter-on-quarter GDP gain in the first quarter of the year, and a very slow acceleration thereafter, leading to an average of 0.8% growth for the whole of 2023. Read this article on THINK TagsItaly industrial production Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

April's confidence data report is a relatively positive one, with confidence improving among consumers, builders and service providers, while falling back among manufacturers and retailers. Interestingly, they now all share expectations of a deceleration in inflation Italian consumers are more upbeat Consumers are more upbeat and less concerned about future unemployment Consumer confidence in Italy rose in April for the fourth consecutive month, pushed up by an improvement in the perception of the current economic environment. While consumers are less optimistic about future economic developments, they don’t believe this will translate into higher unemployment risks, according to the index sub-components. This might be due to the belief that there is increasing tightness in the labour market. Interestingly, this confidence has not yet translated into an increased willingness to buy durable goods; consumers are instead choosing to save right now. This could suggest that the sharp decline in the saving ratio seen over the second half of last year (it fell to 5% in the fourth quarter of 2022) possibly reached alarming levels.   Builders still helped by incentive schemes The increase in confidence in the construction sector, more marked among residential builders, suggests that the impact of generous tax incentive schemes (chiefly the so-called super bonus) is still translating into higher activity. With incentives remaining in place and the backlog ample, we expect such resilience to last throughout the year. Services still improving, driven by tourism Confidence in services improved again in April, reaching the highest level since July 2022. Unsurprisingly, the gain was driven by the tourism component, but services to businesses are also reportedly more upbeat. The long-lasting reopening effect seems to be still fully in place, and points to an ongoing re-composition in consumption patterns out of goods and into services. This is reiterated by softening confidence among retailers, who are reporting slower sales and slightly increased inventories. Read next: Improvement in eurozone economic sentiment starts to level off| FXMAG.COM Manufacturing confidence remains soft After posting a temporary rebound in March, manufacturing confidence set back to January/February levels, confirming that the sector is still going through a relatively soft patch. Muted orders and slightly increasing inventories translate into slightly softer current production and production expectations. With the international backdrop still uncertain, industrial production is unlikely to accelerate meaningfully over the second quarter, notwithstanding the ongoing normalisation in supply chain conditions and declining gas prices, which are now flirting with the €40/MWh level. Today’s report also includes the first quarter’s update on capacity use and production constraints for manufacturers. Capacity utilisation was stable at 77.5% and the constraints front confirms that in the current environment, the availability of plants and materials is the main obstacle, followed closely by insufficient demand (stable over the last three quarters) and by an increasing lack of manpower. Interestingly, the increasing relevance of the labour factor at a time when the post-Covid rebound has softened suggests that structural factors and possible supply-demand mismatch in the labour market are currently at play. Somewhat surprisingly, access to funding is still not deemed to be an obstacle to production. At least for industry, the full impact of higher funding costs is failing to show up in the numbers. All sectors now expect declining inflation A common feature among all sectors was the decline in price expectations. While this was, until recently, relegated to manufacturers, which are more exposed to energy price developments, it now also affects services. This is good news for core inflation developments over the second half of 2023. April confidence data tentatively point to positive GDP growth in 2Q23 All in all, today’s confidence report still supports the idea that the Italian economy could post positive GDP growth in the second quarter (we expect a positive reading in tomorrow’s preliminary release for the first quarter). For the time being, indications are that this will be down to services, while the possibility of a positive push from industry is much more uncertain. The ongoing decline in inflation will obviously help, but for a more visible acceleration to materialise we will have to wait for an inversion of the core measure profile as well.      Read this article on THINK TagsItaly inflation Italy Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

This is a very strong reading, but will be hard to replicate, at least in the short run. Still, we now believe that 2023 Italian GDP growth will average slightly above 1% Italy's GDP was surprisingly strong in the first quarter   According to the preliminary estimate by Istat, the Italian economy expanded by a hefty 0.5% quarter-on-quarter in the first quarter of 2024 (+1.8% year-on-year), clearly beating expectations. As usual, the preliminary estimate gives only a very general picture, omitting the detailed demand breakdown. Istat tells us that both domestic demand (gross of inventories) and net exports provided a positive contribution to quarterly GDP growth and that, from the supply side, both industry and services posted positive growth whilst agriculture was stable. We had expected the Italian economy would avoid a recession, but the scope of the expansion is definitely surprising. To be sure, confidence indicators had painted an improving picture, and particularly the PMIs, but these have lost some explanatory power of late. Hard data such as industrial production, instead, had come in on the soft side over the quarter, questioning the possibility of a positive contribution from industry. Industrial turnover data for February, also released earlier today, paint instead a brighter picture for industry. The reported 0.8% month-on-month gain in manufacturing looks clearly more consistent with the GDP release. Having said that, we remain convinced that over 1Q23 the main growth driver has been services, propelled by solid tourism flows. Read next: Poland’s CPI inflation down in April on food prices| FXMAG.COM On the demand front, we suspect that the normalisation in supply chains might have had a bigger role than anticipated, providing an extra boost through the export channel. Also, after providing a markedly negative contribution in 4Q22, a sharp decline in inventory de-cumulation might also have become a temporarily powerful growth driver. We deem less likely a positive surprise coming from private consumption. Over the quarter, households were still hit by high (if slowing) price pressures, only very partially compensated for by slow contractual wage growth (at 2.2% in March) and the saving ratio had already fallen in 4Q22 to an unusually low level of 5%, with very limited scope for further declines. All in all, today’s release is doubtless a positive surprise, which is unlikely to be repeated in the next few quarters. With the impact of past rate hikes yet to fully filter through the economy (and with more rate hikes to come) we suspect that the pace of the Italian economic expansion will slow down over the next quarters. Having said that, with the statistical carryover for Italian 2023 GDP growth at 0.8% after today’s release, we will likely revise our forecast above the 1% threshold. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The road to headline disinflation is proving a winding one, and the profile is affected by the timing of past administrative decisions. Stable core inflation is comforting, but we will likely need more time for a clear decline   After posting four consecutive declines, headline inflation surprisingly increased in April to 8.3% year-on-year (from 7.6% in March), according to the preliminary estimate released by Istat. The harmonised measure reached 8.8% YoY from 8.1% in March. Once again, the driver was energy inflation, this time pushing up the headline measure due to an unfavourable base effect, which we had undervalued. More in detail, the culprit of the acceleration was the non-regulated part of the energy basket (+26.7% YoY from 18.9% in March), helped by recreational services and personal care. The disinflationary impact of regulated energy prices, which we had anticipated, and the small deceleration in food, lodging and travel service prices were not enough to compensate.   Core inflation was stable at 6.3% for the third consecutive month, suggesting that stickiness will likely make the disinflationary process a relatively slow one. After April’s release the statistical carryover for headline and core inflation for 2023 stand at 5.4% and 4.6%, respectively. Read next: ECB enters final stage of tightening cycle| FXMAG.COM All in all, today’s data confirms that the disinflationary process is not a linear one, with the profile conditioned by base effects determined by the timing of past administrative actions on energy prices. As a side effect, this adds so much noise to the data that short-term inter-country comparisons are almost useless. Also, the initial reopening effect on some services’ prices is proving stickier than expected. Having said that, the path to a further deceleration of inflation remains solid. Producer prices are decelerating sharply and pricing intentions as reported by business surveys have lately extended from manufacturing to services. This is, in principle, good news for core inflation developments, but data is showing that the process will likely be slow, and should accelerate only over the second half of the year. After today’s release, we will likely slightly revise up our forecast for average 2023 inflation, now at 5.7%. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

10Y US Treasury yields are more than 60bp away from the peak they reached in early March, prior to the regional banking crisis. The Fed has been pushing a more hawkish line disappointed by the lack of progress on the inflation front, but end-2023 Sofr futures still price a rate that is 50bp below the early March peak.   At least so far, this doesn’t feel like a wholesale reappraisal of the market’s macro view although a more forceful Fed communication at the 14 June meeting, with potentially a hike and a higher end-2023 median dot, could push us closer to this year’s peak in rates.     ECB pricing is hard to move but markets look to the BoE for guidance In Europe, today’s inflation prints from France, Germany, and Italy will, in addition to yesterday’s Spanish release, give us a pretty good idea of where the eurozone-wide number will fall tomorrow. If the drop in Spain’s core inflation is any guide, EUR markets will struggle to follow their US peers higher.   Add to this that it is difficult for euro rates to price a path for policy rates that materially diverges from their US peers. Even if the Fed hikes in June or July, the EUR swap curve already prices ECB hikes at both meetings. Swaps assign a low probability to another hike in September for now.   That probability may well rise but we think any labour-market induced sell-off in US Treasuries will reflect, in part, in wider rates differentials between the two currencies.   It is difficult for euro rates to price a path for policy rates that materially diverges from their US peers  

Weak Chinese manufacturing data put pressure on the single currency as Europe, particularly Germany, is highly correlated with China.   However, the Eurozone's data is not so bad today. The number of unemployed in Germany rose by 9K, down from 23K and 19K in the previous two months. Unemployment is rising much more slowly than in the recessions of 2009 and 2020, and the unemployment rate (5.6%) is low by historical standards.   Second estimates confirmed a 0.2% q/q and 0.9% y/y rise in French GDP in the first quarter, although private consumption fell by a further 1% in April after a 0.8% decline in the previous two months.   For Italy, the final data pointed to economic growth of 0.6% q/q and 1.9% y/y, 0.1 percentage points higher than previously estimated.   Despite the upbeat economic data, the EURUSD fell to 1.0660 in early European trading, its lowest level since 17 March.

UK Mortgage Approvals (Apr) – 31/05 We've started to see a modest improvement in mortgage approvals since the start of the year, after they hit a low of 39.6k back in January, as the sharp rise in interest rates at the end of last year weighed on demand for property as well as house prices.   As energy prices have come down, along with lower rates, demand for mortgages has started to pick up again with March approvals rising to 52k, while net consumer credit has also started to improve after similar weakness at the end of last year.   With inflationary pressures starting to subside we could see this trend continue in the coming months, as long as energy prices remain at their current levels, and the Bank of England starts to signal it is close to being done on raising rates.     Manufacturing PMIs (May) – 01/06 Last week saw the latest flash PMIs show that manufacturing activity in France and Germany remained weak, while in Germany activity deteriorated further to its lowest levels since June 2020, when economies were still reeling from the effects of pandemic lockdowns.   We also found out that the German economy was in recession after Q1 GDP was revised lower to -0.3%. The UK and US on the other hand were able to see a modest pickup in economic activity. It is clear that manufacturing globally is in a difficult place, we're also seeing it in China, as well as copper and iron ore prices, which suggests that global demand is weakening sharply.   Italy and Spain economic activity is also expected to see further weakness in manufacturing when their latest PMIs are released later this week.

FXMAG.COM: Could you please comment on the CPI in eurozone? The CPI in the Eurozone in May might remain at 7% y/y. For Spain and Belgium, the problem of inflation is fading into the background. Here, inflation indices are below the consensus level. For France and Germany, on the contrary, the topic of prices remains acute. The food segment is still a key contributor to high inflation. Agricultural costs are decreasing, and energy is becoming cheaper. Yet, a number of products remain extremely expensive for consumers. By comparison, cheese in Germany now costs almost 40% more than last year, and potatoes are 14% more expensive. Throughout the EU, food inflation rose by almost 17% y/y in April and might be even higher in May. The constantly rising food prices force households to cut demand at a time of low income. In Italy, for example, there was a special meeting of politicians about the rising price of spaghetti. This is a real problem. Next, we see the following. The agricultural sector is reducing basic spending on food production. Yet labour costs are rising. In addition, supply chain issues persist. It is unlikely that food will become cheaper in the nearest future. Globally, rising prices might put pressure on the ECB to raise interest rates further.

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

The eurozone’s improving inflation outlook could leave the ECB behind the curve Slowly but surely, the inflation outlook for the eurozone is improving. Headline inflation is normalising, but persistent core inflation is complicating things. While this remains the case, the European Central Bank will continue hiking interest rates – but for how long?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply and is widely expected to continue to fall over the months ahead. The decline in natural gas prices has been remarkable over recent months, and while it would be naïve to expect the energy crisis to be completely over, this will result in declining consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there's more to come in terms of a downward impact on inflation. For food, the same holds true. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slowing increases. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Historical relationships and post-pandemic shifts As headline inflation looks set to slow down further – at least in the absence of any new energy price shocks – the question is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 80s are not available for many countries – but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 70s and 80s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   During previous supply-side shocks, core inflation did not remain elevated for much longer than headline inflation

Eurozone industrial production up in April but with lots of underlying weakness The production increase in April underwhelms and leaves a good chance of negative overall production growth in the second quarter. The economy, therefore, remains in a stagnation environment as the second quarter is unlikely to show much of a bounceback in economic activity.   The 1% increase in production in April came on the back of a -3.8% decline in March. While this is a disappointing bounceback, the underlying data look worse. Growth was mainly down to a 21.5% increase in Ireland, which has notoriously volatile production data these days. The large countries experienced poor output developments in April. German production was flat according to the European definition, France posted a small 0.8% increase, but Italy, Spain and the Netherlands experienced a contraction of -1.9, -1.8 and -3.5% respectively.   Industrial dynamics provide a mixed picture at best for the sector. New orders have been weak for some time now. Domestic demand for goods has been declining for a while and global activity has also disappointed. Besides that, the catch-up effects from supply chain disruptions have been fading. On the other hand, lower energy prices should work favourably from a production perspective, but overall this is not yet resulting in stronger activity.   This release does not bode well for second-quarter GDP. The small increase in production in April leaves industrial output well below the first-quarter average. Given that May surveys of the sector continue to be downbeat, it is likely that production will contract on the quarter. With retail sales sluggish in April and May surveys pessimistic, don’t expect much of a second quarter in terms of economic recovery after two quarters of negative growth.

Italy: Confidence data points to a mixed economic outlook June's confidence data paints a mixed picture for Italy's economy, with consumers increasingly upbeat and businesses remaining less optimistic. We're hopeful for continued growth in the second quarter, but expect some softening off the back of weaker net exports.   An upbeat outlook from consumers The most striking element of June's data came from consumers. We had anticipated an improvement there, but not such a drastic development. The breakdown shows a marked improvement in both economic and personal climates which extends to expectation components. On the back of a slowly improving inflation backdrop, we believe the very reason for consumer optimism lies primarily with the resilience of the labour market.   The unemployment expectation component of the survey slowed markedly in June. When matching this with the decline in the current opportunity to save sub-index, we sense that the compression in the Italian saving ratio is still in place, with a possible positive bearing on private consumption.   Manufacturing confidence softens On the business front, confidence unsurprisingly declined again among manufacturers, with the lowest levels recorded since January 2021. Here, the decline in orders coupled with a small increase in inventories led to the fourth decline in a row in the production expectation component. Softer demand in key export destination countries such as Germany is apparently taking its toll – and it doesn't seem as though the domestic component linked to the flow of investment activated by the recovery and resilience of European funds is able to compensate. Interestingly, the consumer goods segment seems less affected.   Construction confidence rebound The only business sector that saw a positive reading was construction. With a three-point rebound, the index is back up close to historical highs, propelled by the residential building component. The tailwind of generous tax incentives for energy-efficient renovations is still at play, suggesting the backlog was so significant that the reduction of the incentives introduced at the beginning of the year has not yet resulted in an obstacle to supply.   Services only softly down, with tourism surprisingly weak The small decline in services confidence resulted from an increase in the transport, storage and communication components, as well as a surprising decline in tourism services. The latter comes after two months of continued strength and has been driven by recent developments in both current affairs and a sharp fall in orders. It also flashes warning signals for the incoming tourism season.   Second quarter set for positive but softening GDP growth All in all, today’s confidence data release suggests that conditions are still there for a positive second quarter. We're hopeful for continued strength in consumption, which proved surprisingly strong in the first quarter. On the investment front, the construction component still appears able to provide some push. Net exports, however, look set to remain a drag on quarterly growth. We aren't expecting another repeat of the first quarter’s 0.6% growth, but should still see a positive reading for the second quarter.

Rates Spark: Different causes, same effect The US and European economic trajectories are diverging. Yields have followed, albeit more modestly. In both cases the result is ever flatter curves, helped by seasonal factors.   Yield differentials widen, but all curves flatten It is hard to completely dismiss technical factors when finding an explanation for the continued flattening of yield curves heading into the summer market lull. Expectations of calmer market conditions in the summer don’t always come true but worse liquidity make investors wary of keeping positions that carry negatively, for fear of being unable to exit them should markets move against them. We think this is an important factor adding a tailwind to the curve flattening. We think steepeners have been a popular trade in recent months as investors foresee the end of central banks’ hiking cycles. The problem is, these are costly to hold. For instance, a euro swap 2s10s steepener costs over 6bp per quarter in carry. Its US dollar equivalent cost over 17bp.   Of course, it helps that curve flattening is the rational reaction to a world where the economic outlook is worsening, look for instance at Europe or at the disappointing recovery in China. Add to that central banks adding another layer of hawkish paint at the European Central Bank‘s (ECB) Sintra conference which continues today, and you have the perfect recipe for a flatter curve. This thesis get an important reality check over the coming days in the eurozone, in the form of the June inflation data. Italy is the only country to publish its own today, but markets may well be tempted to extrapolate its finding to other countries until they publish their own.   One country that seems impervious to the overall gloom is the US. Perhaps due to its lower reliance on global demand for growth, or perhaps due to the resilience of its domestic job market. The result is the same. Markets increasingly believe the Fed will hike at least once more in this cycle. If US curve developments are highly correlated to its foreign peers, albeit for slightly more upbeat reasons, its curve has shifted upwards relative to its European peers. Despite arguably encouraging progress relative to Europe on the inflation front, euro-dollar yield differentials have widened. This yield divergence coincides with the divergence in economic surprise indices, albeit to a less spectacular extent.   EU gloom and US glee both result in flatter curves, helped by carry   Today's events and market view Italy is the first Eurozone member state to release its June inflation today. It will be followed by Germany and Spain tomorrow, and France and the eurozone on Friday. ECB monthly monetary aggregate data, including M3 growth, and Italian industrial production complete the list. US data is relatively thin today, with only mortgage applications and inventories to look out for. This will leave plenty of time for investors to scrutinise central banker comments with an all-star line-up comprising Fed, ECB, Bank of Japan and Bank of England governors. TLTRO and eurozone financial system nerds will also look at the 3m LTRO allotment which settles tomorrow, a day after today's June TLTRO repayments. Yesterday, settling with the repayments, the central bank allotted €18bn at the weekly main refinancing operations facility, the most since 2017. Presumably, some lenders find its 4% interest rate the most attractive option, or maybe the only available, to finance the repayment of TLTRO funds. Italy accounts for today’s euro sovereign bond supply with 2Y debt, followed in the afternoon by the US Treasury selling 2Y FRN and 7Y T-notes.

US non-farm payrolls (Jun) – 07/07 – the US jobs market has continued to confound expectations for all this year, and it is this factor that is making the Federal Reserve's job in trying to return inflation to its target rate much harder to achieve. When the May payrolls report was released a month ago, we once again saw a bumper number, this time of 339k, with April revised up to 294k. The resilience of the jobs market has also been a little embarrassing for the economics profession, comfortably beating forecasts for the 14th month in succession. It also presents a problem for the Federal Reserve in the context of whether to to stick or twist when it comes to more rate hikes in the coming months. We've already seen a pause in June, however the commitment to raise rates by another 50bps by year end has got markets a little nervous, driving yields higher at the short end of the yield curve. For June, forecasts are again for a number below 300k, at 213k. We did see a rise in the unemployment rate from 3.4% to 3.7% while the participation rate remained steady at 62.6%. Wages also remained steady at 4.3%, however we also know that job vacancies after briefly dipping below 10m in March, rose strongly again in April to 10.1m. Against this sort of backdrop the Federal Reserve had to downgrade its forecast for end of year unemployment from 4.5% to 4.1%. Even with this adjustment it's hard to see how this will play out unless we see a significant rise in the participation rate, and vacancies start to disappear.         RBA rate decision – 04/07 – having paused earlier this year when it came to their own rate hiking cycle the RBA now appears to be playing catchup. Having caught the markets by surprise in April by hiking rates by 25bps, they followed that up in May by another 25bps rate increase pushing the cash rate up to 4.1%. The sudden hawkish shift in stance appears to have been prompted by stinging criticism over its failure to spot early enough the inflation surge seen at the end of 2021, and through 2022. They were hardly unique in this, with other central banks being similarly caught out, however their response has been fairly tepid, in comparison to the likes of the RBNZ where rates are much higher at 5.5%. This suggests that the RBA might feel it has to overcompensate in the opposite direction, running the risk of them tightening too hard and unsettling the housing market. Will the RBA raise rates again or decide to wait and see.               Manufacturing PMIs (Jun) – 03/07 –. recent flash PMI numbers suggest that the underperformance in manufacturing has continued in June with activity in Germany falling to its lowest level since March 2020, at 41, and the initial Covid lockdowns. In France we saw similar weakness albeit slightly higher at 45.5. Of slightly great concern has been weakness in Chinese economic activity with weak demand there feeding into a global narrative that the economy is slowing, weighed down by higher costs and varying degrees of supply chain disruption. Economic activity in Italy and Spain has also been weak, however on the plus side they have managed to outperform France and Germany. If the eurozone is to avoid a 3rd quarter of negative growth then it is Italy and Spain that might allow them to do it. 

Services PMIs (Jun) – 05/07 - despite the dire start of manufacturing activity, services have held up well but even here we are seeing pockets of weakness with France seeing a sharp drop in the flash numbers a few days ago, sliding from 52.5 to 48, while activity in the rest of the euro area remains broadly positive. This is an area that could help boost economic activity in Italy and Spain now we're in the holiday season and which may help avert a 3rd quarter of weakness. We're also expected to see positive readings from the UK and the US.   Fed minutes – 05/07 – recent briefings from various Fed officials do suggest that a divergence of views is forming on how to move next, as well as in the coming months, and while the commitment to a pause in June was well flagged the commitment and guidance did pose a bit of a problem to the Fed given the strong economic data only days before the meeting in question. Powell managed to overcome that with a strongly hawkish message at his press conference along with an upgrade to the central banks key economic forecasts. A number of members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July looking increasingly likely.  This was somewhat surprising given markets were pricing one more rate hike, however key in amongst this is the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets. This slowly appears to be being priced out, as is the possibility that the Federal Reserve, along with other central banks, looks to prioritise pushing inflation down at the risk of raising the level of unemployment. This week's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of further rate rises.    AO World FY 23 – 05/07 – has had its share of problems after getting a huge lift during the pandemic as business for electrical goods shifted online. These growing pains presented problems of their own in terms of scaling its operations so when the inevitable slowdown happened the business struggled to cope as costs surged. Back in 2021 the shares rose to a record high of 443p, as a pandemic buying frenzy pushed the shares up from lows of 48.5p in the space of 9 months. It's taken a little bit longer to round-trip that journey with the shares hitting a record low back in August of 39p. We've seen a decent recovery since then, helped by a number of guidance upgrades this year, one on January, with the focus on reducing costs with revenues set to see a 17.2% decline from last year. In March EBITDA guidance was raised again, to between £37.5m and £45m, with management citing further margin improvements. In April this was followed by a Q4 trading update which predicted UK revenues of £1.13bn while updating its profit guidance to the top end of its recent range upgrade of EBITDA of between £37.5m to £45m. In a sign of confidence regarding AO's turnaround plan, in June Mike Ashley's Fraser Group acquired a 19% stake in the business at 68p per share in a welcome boost for the online retailer.  

Manufacturing PMIs point to contraction across the eurozone but euro remains steady US ISM Manufacturing PMI weakens US PCE Index slows but Fed still expected to hike in July EUR/USD is almost unchanged on Monday, trading at 1.0909.   Eurozone manufacturing continues to sputter The eurozone manufacturing sector has been in poor shape for months and the downturn worsened worse in June. The eurozone PMI slowed to 43.4 in June, down from 44.8 and shy of the consensus of 43.6 points. Germany, the largest economy in the bloc, looked even worse, as the PMI fell to 40.6, down from 43.2 and below the consensus of 41.0 points. Spain, Italy and France also reported readings below 50, which separates contraction from expansion. Manufacturing in the eurozone has now contracted for 12 straight months and the PMI reading was the lowest since May 2020. Customer demand has fallen sharply and manufacturing employment declined in June for the first time since January 2021. These latest numbers indicate that manufacturing is in trouble, but this is nothing really new and the euro shrugged off the weak numbers. The news wasn’t much better in the US, as ISM Manufacturing PMI eased to 46.0 in June, down from 46.8 in May. ISM Manufacturing Employment contracted as well, falling from 51.4 to 48.4 and missing the consensus of 50.5 points. The week wrapped up with inflation releases showing that deceleration is alive and well. On Friday, the PCE Price Index, which is the Fed’s preferred inflation indicator, declined from 0.4% to 0.1% in June. As well, UoM Inflation Expectations dropped to 3.3% in June, down from 4.2% in May and the lowest since March 2021. Inflation may be headed in the right direction, but the Fed is still widely expected to raise rates at the July 12th meeting. Traders have priced in a 25-basis point hike at 86%, according to the CME FedWatch tool.   EUR/USD Technical EUR/USD is putting pressure on support at 1.0908. This is followed by support at 1.0838 1.0980 and 1.1050 are the next resistance lines    

Services PMIs and Fed minutes in focus By Michael Hewson (Chief Market Analyst at CMC Markets UK) In the absence of US markets yesterday, European markets underwent a modestly negative session on a fairly quiet day, and look set to open modestly lower this morning, with Asia markets drifting lower. For the past few days, markets have been trading in a broadly sideways range with little in the way of momentum, as investors weigh up the direction of the next move over the next quarter.   The last few weeks have been spent obsessing about the timing of a possible recession, particularly in the US, with the timing getting slowly pushed back into 2024, even as bond markets flash warnings signs that one is on the horizon.     As we look ahead to Friday's US payrolls report, speculation abounds as to how many more central bank rate hikes are inbound in the coming weeks, against a backdrop of economic data that by and large continues to remain reasonably resilient, manufacturing notwithstanding.     Despite the dire start of manufacturing activity as seen earlier this week, services have held up well, although we are now starting to see some pockets of weakness. A few days ago, in the flash numbers France saw a sharp fall in economic activity, sliding from 52.5 to 48 for June, although activity in the rest of the euro area remains broadly positive.     This is an area of the economy that could help boost economic activity, particularly in Italy and Spain now we're in the holiday season and has seen these two countries perform much better in recent months. The outperformance here could even help avert a 3rd quarter of economic contraction for the euro area.       Expectations for Spain and Italy are 55.7, and 53.1, modest slowdowns from the numbers in May, while France and Germany are expected to slow to 48 and 54.1.     We're also expected to see a positive reading from the UK, albeit weaker from the May numbers at 53.7. US PMI numbers are due tomorrow given the July 4th holiday yesterday.     Later today with the return of US markets, we get a look at the most recent Fed minutes, when the FOMC took the collective decision to keep rates on hold, with the likelihood we will see a resumption of rate hikes later this month.     In the lead-up to the decision there had been plenty of discussion as to the wisdom of pausing given how little extra data would be available between the June and July decisions. The crux of the argument was if you think you need to hike again, why wait until July when the only data of note between the June and July decisions is one payrolls report, and one set of inflation numbers.     All of that is now moot however and while inflation has continued to soften, the labour market data hasn't. Here it remains strong with tomorrow's June ADP report, the May JOLTs report, weekly jobless claims, as well as Friday's June payrolls numbers.     Tonight's minutes may offer up further clues as to the Fed's thinking when it comes to why they think that two more rate hikes at the very least will be needed by the end of this year.     A few members changed their dots to reflect the prospect that they were prepared to raise rates twice more by the end of the year, with a hike in July now almost certain. This stance caught markets off guard given that pricing had been very much set at the prospect of one more rate hike, before a halt.     A key part of the thinking may have been the Fed's determination that markets stop pricing rate cuts by the end of this year. This insistence of pricing in rate cuts by year end has been one of the key characteristics that has helped drive recent gains in stock markets.     This has now been largely priced out, so in this regard the Fed has succeeded,   The key now is to make sure that the Federal Reserve, along with other central banks, while prioritising pushing inflation down, don't break something else, and start pushing the rate of unemployment sharply higher.   This is the balancing act central banks will now have to perform, and here it might be worth them exercising some patience. Given the lags being seen in the pass through of monetary policy it may be that a lengthy pause after July, keeping rates at current levels for months, is a wiser course of action than continuing to raise rates until the tightrope snaps, and the whole edifice comes tumbling down.       Today's minutes ought to give us an indication of the thought processes of the more dovish members of the FOMC, and how comfortable they are with the prospect of this balance of risks.             EUR/USD – remains range bound with support around the 1.0830/40 area and 50-day SMA, with resistance remaining at the 1.1000 area. A break below the lows last week opens the way for a potential move towards 1.0780.     GBP/USD – still looking well supported above the 50-day SMA at 1.2540, as well as trend line support from the March lows, bias remains higher for a move back to the 1.3000 area. Currently it has resistance at 1.2770.       EUR/GBP – rolling over again yesterday, sliding below the 0.8570/80 area, and looks set to retarget the 0.8520 area. Resistance remains at the 50-day SMA which is now at 0.8655. Behind that we have 0.8720.     USD/JPY – currently capped at the 145.00 area, with support at the 144.00 area this week.  The key reversal day remains intact while below 145.20.  A break below 143.80 targets a move back to the 142.50 area. Above 145.20 opens up 147.50.      FTSE100 is expected to open 5 points lower at 7,514     DAX is expected to open 28 points lower at 16,011     CAC40 is expected to open 23 points lower at 7,347

Today's events and market view Ahead of Germany’s factory order and industrial production (IP) to be released tomorrow and Friday respectively, IP figures for France and Spain will be published this morning. Services PMI for Europe this morning are all second readings except for Italy and Spain. A further decline in the services index would undermine the ECB’s hawkish message, with employment and price components of particular interest. The ECB publishes its monthly consumer survey which includes questions on inflation expectations. The disinflation narrative should receive a boost from Eurozone PPI settling around negative values. US data consists of factory and durable goods orders. This will be followed by the minutes of the June FOMC meeting, where the Fed’s committee decided not to increase rates for the first time since early 2022. The Fed will be keen for markets to see the hawkish side of that decision and that it heralds a more protracted tightening cycle. The Fed’s dot plot still implies 100bp of cuts in 2024. Fed communication may well chip away at that message next. Bond supply consists of the UK selling 3Y debt.

  The disinflationary trend in the eurozone has started and should gain more momentum after the summer. It will take a while but core inflation should follow suit as well.   Slowly but surely, the inflation outlook for the eurozone is improving. Base effects as well as fading supply chain frictions and lower energy prices have and will continue to push down headline inflation in the coming months – a drop that the European Central Bank deserves very little credit for orchestrating. With headline inflation gradually normalising, the big question is how strong the inflation inertia will be. As long as core inflation remains stubbornly high, the ECB will continue hiking interest rates. How long could this be?   Inflation is moving in the right direction, but will core inflation remain stubborn? Headline inflation has come down sharply, which is widely expected to continue over the months ahead. The decline in natural gas prices has been remarkable over recent months and while it would be naïve to expect the energy crisis to be over, this will result in falling consumer prices for energy. The passthrough of market prices to the consumer is slower on the way down so far, which means that there will be more to come in terms of the downward impact on inflation. The same holds true for food. Food inflation has been the largest contributor to headline inflation from December onwards, but recent developments have been encouraging. Food commodity prices have moderated substantially since last year already, but consumer prices are now also starting to see slow. In April and May, month-on-month developments in food inflation improved significantly, causing the rate to trend down.   Headline inflation – at least in the absence of any new energy price shocks – looks set to slow down further, but the main question now is how sticky core inflation will remain. There are several ways to explore the prospects for core inflation.   Let’s start with the historical relationships between headline and core inflation after supply shocks. Data for core inflation in the 1970s and 1980s are not available for many countries, but the examples below for the US and Italy show that an energy shock did not lead to a prolonged period of elevated core inflation after headline inflation had already trended down. In fact, the peaks in headline inflation in the 1970s and 1980s saw peaks in core inflation only a few months after in the US and coincident peaks in Italy. We know that history hardly ever repeats, but it at least rhymes – and if this is the case, core inflation should soon reach its peak.   History is one thing, the present another. Digging into the details of current core inflation in the eurozone shows a significant divergence between goods and services, regarding both economic activity and selling price expectations. Judging from the latest sentiment indicators, demand for goods has been weakening for quite some time already. At the same time, easing supply chain frictions and lower energy and transport costs have taken away price pressures, leading to a dramatic decline in the number of businesses in the manufacturing sector that intend to raise prices over the coming months.      

Recent PMI readings in the European economy have raised concerns about the future of the region. The Euro area composite PMI dipped below the 50-point mark, indicating a contraction for the first time this year. This significant shift in momentum suggests a potential 3 to 6-month period of economic decline.  The tightening monetary policy by the European Central Bank (ECB) aimed at reducing inflation has contributed to these contracting indicators. The drop in composite PMI was driven by a decline in both manufacturing and services PMI, with manufacturing consistently below the expansion territory. However, services PMI still remains in expansion, although a continued decrease could indicate contracting business confidence. Job creation in the Euro area remained limited to the services sector, while employment in factories declined for the first time in over two years. This slowdown in hiring, coupled with a decrease in business confidence, may lead to rising unemployment rates. On a positive note, the weakness in PMI readings can be partly attributed to destocking activities, which can benefit businesses in the long run. Additionally, there have been slight improvements in new order numbers, particularly in Italy's construction sector, suggesting a potential turnaround. These dynamics will likely influence the ECB's monetary stance moving forward.   FXMAG.COM:  How would you comment on the entire series of PMI readings from the European economy? What do the sentiment in industry and services say about the future of the European economy?   Santa Zvaigzne-Sproge, CFA: The Euro area composite PMI came out below the 50-point level indicating that it has entered the zone of contraction for the first time this year. This was a considerable change in momentum in comparison to April’s reading of 54.1 and even the previous month’s reading of 52.8. Furthermore, the historical data show us that once the PMI slides below the 50-point mark, it tends to stay there for a 3 to 6-month period. As tightening monetary policy by the ECB has been performed with the key aim to draw down inflation by reducing economic activity, contracting economic indicators such as PMI may not be a big surprise.    The drop in composite PMI resulted from a combination of lowering manufacturing PMI and services PMI data. However, the difference between both is nearly 10 points with services PMI still being in the expansion territory while manufacturing has not been there since August 2022. The large difference might be partially explained by the nature of both sectors. Manufacturing generally implies more capital intensity and longer production times, therefore, requiring more planning ahead, while services may be more flexible and adapt faster. However, if the services PMI data continues to lower, it may indicate that business confidence is contracting also in this sector.    In June, private companies in the Euro area maintained their efforts to expand their workforce, but job creation was limited to the services sector, while employment in factories declined for the first time since January 2021. The slowdown in hiring coincided with a decrease in business confidence across the Euro area. While firms maintained an optimistic outlook, the level of positive sentiment reached its lowest point in 2023 thus far. Growth expectations also softened in both the manufacturing and services sectors. In case job growth continues to stagnate, it may translate into increasing unemployment rates across the Euro area, which may give the ECB a reason to reconsider its hawkish monetary stance.    To finish on a more positive note, we need to point out that the weakness in PMI readings has been partially associated with destocking, leading to lower new order numbers. While negatively affecting PMI numbers, destocking may be considered as cyclical activity performed by managers beneficial to their businesses. Furthermore, destocking cannot last endlessly – once the stock levels reach a certain point, new orders may need to go up to support the “restocking”. There has been a somewhat positive development in this section in Italy where according to the latest construction PMI report, new orders increased marginally ending the six-month-long strike of contraction.  Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service) Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73,02% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

June ECB minutes – gaps in the hawkish line? The European Central Bank will release the minutes of the June policy meeting. Recall that the ECB hiked rates by 25bp and all but pre-announced another 25bp hike for this month. Markets have more than complied and are now more than fully discounting one more hike by the end of the year. This contrasts with more signs that inflation pressure is actually starting to ease, not just in the US but also in the eurozone. But it also suggests markets are for now still fully embracing the ECB’s focus on current inflation and it basing the policy stance on backward-looking data – a clear preference to err on the side of doing too much when it comes to inflation. But there have also been important voices within the ECB’s governing council which seem to take a more centrist view. The Bank of France’s Francois Villeroy recently acknowledged that there was “first good news” on inflation and that policy rates would soon reach their terminal rate. ECB observers will scour today’s minutes to see whether the hawkish consensus is starting to crack in light of the softer macro backdrop. After all, we also believe that the ECB’s own growth forecasts on which the hawkish case is based look overly optimistic.   Today's events and market view The main event from a European perspective is the ECB minutes of the June meeting. The question is whether a softening macro backdrop will also heat up the debate between the ECB’s relatively silent doves and the currently dominant hawks. Over in the US, the focus will be on producer prices, which should suggest further easing pipeline pressure for prices. The initial jobless claims give a more contemporaneous read on the job market after the underwhelming payrolls report last week. Consensus is not seeing a large change with 250k initial claims after 248k last week and stable continuing claims, but with more signs of inflation cooling, the resilience of the labour market may be less of a worry, at least in the eyes of the market. Fed speakers will be watched more closely following the CPI release and given the fact that the pre-meeting black-out period will set in this weekend, a meeting at which the Fed could well deliver this cycle’s last hike. First voices yesterday, such as Richmond’s Thomas Barkin, already warned against backing off too soon. Scheduled for today is San Francisco’s Mary Daly while Governor Christopher Waller is slated for tomorrow. Supply will come from Italy and later in the day from the US, where a US$8bn 30y bond auction awaits.

 Vodafone Q1 24 – 24/07 it's been one way traffic for the Vodafone share price so far this year, with declines on declines, with the shares at 25-year lows. The departure of Nick Read as CEO hasn't been enough to stop the rot with new CEO Margherita Della Valle seemingly unable to convince markets she has a coherent plan to turn the business around. In May the telecoms company announced it was looking to cut 11k jobs over the next 3 years, as it announced its full year number. Full year group revenues rose 0.3% to €45.7bn.   The Germany business continues to underperform, posting a decline of 1.6%, driven by the loss of broadband customers, while the UK did much better, seeing an increase of 5.6%, which was driven by an 8% increase in mobile service revenue.   Its other markets in Spain and Italy also saw declines in organic service revenue of 5.4% and 2.9%. Full year pre-tax profit for the year rose to €12.82bn, however most of this was down to the gains from the disposal of the Vantage Towers business, of €8.6bn. Vodafone also generated an additional €689m from the completion of the sale of its Ghana business, as well as a loss of €69m on its disposal of Vodafone Hungary.   Investor concern remains primarily around the company's debt level at a time when the company seems to lack a growth strategy. On the plus side the company has announced that it is working through the final details of the merger of its British operations with Hong Kong's Hutchison Holdings, which runs the Three network.  

Most European banks prove resilient in bank stress tests The European bank stress tests didn't reveal big capital gaps. Overall, we think the results confirm that the banking system is strongly capitalised and we see the results as supportive for bank risk.   No "official" pass or fail in the stress tests, but some banks come out with very limited capital gaps The European Banking Authority published the results of the European bank stress tests on Friday evening. The majority of banks weathered the adverse conditions well with only three banks falling short of the risk-weighted assets-based minimum capital requirements in the adverse scenario. Another four banks would fall short of the minimum leverage ratio-based requirements.  No big capital gaps were revealed, however. We would argue that German and French banks scored perhaps slightly weaker in the tests. As the EBA puts it, the exercise is not meant to be a pass or fail exercise but it acts as a supervisory tool and as an input for Pillar 2 assessments of banks. The EBA does not publish the names of individual banks that do not meet requirements. We identify those banks falling short of the minimum requirements to be based in France, Germany, Greece and Italy. Most gaps in the requirements are, however, very limited. The only larger gap would be diminished by the application of the IFRS 17 standard.   Some banks would struggle to fill their buffer requirements despite staying above their minimum requirements The tests, however, act as a good reminder that if the going gets tough, banks may face limitations on their distributions such as in paying their AT1 coupons. In the adverse scenario, several banks wouldn’t be able to fill their buffer requirements despite staying above their minimum capital requirements.  The EBA tests examined the resilience of 70 larger European banks in a baseline and adverse scenario in 2023-2025. The European Central Bank examined additional banks, with the total coming in at 98.   We examined the individual bank performance more closely in our research note published on 31 July called European Banks: Stress tests prove stressful for some banks available for our Investment Research subscribers. 

Bank of England set to raises rates to a new 15 year high European markets underwent another negative session yesterday, clobbered by concerns over weaker than expected economic activity, which in turn is raising concern for earnings growth heading into the second half of the year. Throw in a US credit rating downgrade from Fitch and the catalyst for further profit taking after recent record highs for the DAX completed the circle of negativity.     US markets also underwent a negative session, with the Nasdaq 100 undergoing its worst session since February, while the US dollar acted as a haven and the yield curve steepened. As a result of the continued sell-off in the US, and weakness in Asia markets, European markets look set to open lower later today, and while the Fitch downgrade doesn't tell us anything about the US political governance that we don't already know investors appear to be looking to test the extent of the downside in the market.     Earlier this week we saw some poor manufacturing PMI numbers which showed that the European economy was very much in recession, with disinflation very much front and centre. This has raised questions as to whether the services sector will eventually succumb to similar weakness. There has been some evidence of that in recent readings but by and large services activity has been reasonably robust. In Spain services activity is expected to remain steady at 53.4, along with Italy at 52.2. The recent flash numbers from France saw further weakness to 47.4, while in Germany we can expect to see a resilient 52, down from 54.1.         EU PPI for June is expected to slip further into deflation to -3.2% year on year. In the UK services activity is expected to slow to 51.5 from 53.7. With inflation unexpectedly slowing more than expected in June to 7.9% it could be argued that the pressure on the Bank of England to hike by another 50bps has eased somewhat, especially since the Fed and the ECB both hiked by 25bps last week.     Having seen core CPI slow by more than expected to 6.9% forward rate expectations have eased quite markedly in the past few weeks. Forward market expectations of where the terminal rate is likely to be, have slipped from 6.5%, to below 6%. It's also likely that inflation for July will slow even more markedly as the effects of the energy price cap get adjusted lower which might suggest there is an argument that we might be close to the end of the current rate hiking cycle.     The fly in the ointment for the Bank of England is the rather thorny issue of wage growth which has moved above core CPI, and could prompt the MPC to err towards the hawkish side of monetary policy and raise rates by 50bps, with a view to suggesting that this could signal a pause over the coming weeks as the central bank gets set to consider how quickly inflation falls back over the course of Q3. Such an aggressive move would be a mistake given that a lot of the pass-through effects of previous rate increases haven't fully filtered down with some suggesting that the Bank of England should pause. In the current environment this seems unlikely given a 25bps is priced in already.       In a nutshell we can expect to see a hawkish 25bps as a bare minimum, and we could also see a split with some pushing for 50bps. We could also get an insight into how new MPC member Megan Greene views the current situation when it comes to casting her vote. One thing seems certain, she is unlikely to be dovish as Tenreyro whom she replaced on the MPC.     We'll also get a further insight into the US labour market after another bumper ADP payrolls report yesterday which saw another 324k jobs added in July. Weekly jobless claims are expected to come in at 225k, while we'll also get an insight into the services sector with the ISM services index for July which is expected to come in at 53. The employment component will be of particular interest, coming in at 53.1 in June, having jumped from 49.2 in May.       EUR/USD – managed to hold above the 50-day SMA for the time being, with a break below targeting further losses towards 1.0830. Resistance currently at last week's high at 1.1150.     GBP/USD – also flirting with the 50-day SMA with a clean break targeting a move towards the 1.2600 area.  Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – continues to edge higher drifting up to the 0.8630 level before slipping back, although it is now finding some support at the 0.8580 area. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to look well supported above the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 10 points lower at 7,551     DAX is expected to open 22 points lower at 15,998     CAC40 is expected to open 15 points lower at 7,297   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  

Analysis of transactions and tips for trading EUR/USD The test of 1.0961 on Friday afternoon, coinciding with the rise of the MACD line from zero, prompted a buy signal that led to a price increase of over 40 pips.     Reports on the volume of orders in Germany and industrial output in France and Italy did not help euro rise last Friday. However, weak data on the US labor market favored bullish traders, leading to a sharp increase in EUR/USD during the US trading session. Today, pressure may return on the pair, unless the data on industrial production in Germany and investor confidence in the eurozone show very good values. Although disappointing reports will continue the pair's decline, a lower-priced euro will certainly attract more buyers.   For long positions: Buy when euro hits 1.0989 (green line on the chart) and take profit at the price of 1.1035. Bullish traders will return to the market in the event of very good reports on the eurozone. However, before buying, ensure that the MACD line lies above zero or just starting to rise from it. Euro can also be bought after two consecutive price tests of 1.0960, but the MACD line should be in the oversold area as only by that will the market reverse to 1.0989 and 1.1035   For short positions: Sell when euro reaches 1.0960 (red line on the chart) and take profit at the price of 1.0919. Pressure will intensify in the case of weak data from the eurozone. However, before selling, ensure that the MACD line lies below zero or drops down from it. Euro can also be sold after two consecutive price tests of 1.0989, but the MACD line should be in the overbought area as only by that will the market reverse to 1.0960 and 1.0919.     What's on the chart: Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely.   MACD line- it is important to be guided by overbought and oversold areas when entering the market Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.    

Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  

06:15BST Tuesday 5th September 2023 Services PMIs set to confirm contraction, RBA leaves rates unchanged  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     European markets struggled for gains yesterday in the absence of US markets, as the initial boost of a China stimulus inspired rally in Asia faded out, even though basic resources outperformed. This late weakness in the European day looks set to continue this morning.      The day began brightly when Asia markets rallied on signs that China's recent stimulus measures were helping to boost the property sector, after a jump in China home sales in two major Chinese cities helped to propel the Hang Seng to 3-week highs. This followed on from the Friday boost of a US jobs report, which added to the argument that the Federal Reserve would be able to keep rates on hold when they meet later this month.     The return of US markets after yesterday's Labour Day holiday should offer a bit more depth to today's price action in Europe with the focus today set to be on the services PMIs for August, after the RBA left Australian interest rates unchanged at 4.10% earlier this morning, and the latest Chinese Caixin services PMI slipped back to its weakest this year at 51.8. No surprises from the RBA keeping rates on hold for the 3rd time in a row, with little indication that rates will be cut in the future, with the central bank insistent that inflation remains too high, and that it will take until late 2025 for prices to return to the 2-3% target range.     For most of this year it has been notable that services PMIs on both sides of the Atlantic have managed to offset the weakness in manufacturing in the form of keeping their respective economies afloat. The strength of services has been a major factor behind the hawkishness of central banks in their efforts to contain inflation with prices and other related costs proving to be much stickier than other areas of the economy, due to high levels of employment and tight labour markets.       In the last couple of months there has been rising evidence that this trend has started to shift with the August flash PMIs from Germany and France seeing a sharp drop off in economic activity. This weakness translated into a sharp slide in services sector activity in both France and Germany during August to 46.7 and 47.3, with Italy and Spain also set to show a similar slowdown, although given the size of their tourism sectors they should be able to avoid a contraction, with Italy expected to slow to 50.4 and Spain to 51.5.     Today's numbers could well be the final piece of the puzzle when it comes to whether the ECB decides to pause its rate hiking cycle, even as August inflation saw an unwelcome tick higher. Further complicating the picture for the ECB is the fact that PPI has been in negative territory for the last 3 months on a year-on-year basis and looks set to slide even further into deflation territory in July. On a month-on-month basis we can expect to see a decline of -0.6% which would be the 7th monthly decline in a row. On a year-on-year basis prices are expected to fall by -7.6%.   On the PMI front the UK services sector is expected to confirm a fall to 48.7 from 51.5 in June, in a sign that higher prices are finally starting to constrain consumer spending.     EUR/USD – holding above the August lows at the 1.0760/70 area for now, as well as the trend line from the March lows. A break of the 1.0750 area potentially opens up a move towards the 1.0630 level. Resistance remains back at the highs last week at 1.0945.     GBP/USD – currently holding above the support at the August lows at 1.2545, after last week's failure to push above the 1.2750 area. We need to push back through the 1.2800 area to diminish downside risk or risk a move towards 1.2400, on a break below 1.2530.         EUR/GBP – the bias remains for a move back towards the August lows at 0.8500, while below the 0.8620/30 area, where we failed last week. We also have resistance at the 50-day SMA, and while below that the bias remains to sell into rallies.     USD/JPY – having found support at the 144.50 area on Friday, the bias remains for a return to the 147.50 area. A break above 147.50 targets a move towards 150.00. Below support at 144.50 targets a move back towards 142.00.     FTSE100 is expected to open 22 points lower at 7,430     DAX is expected to open 34 points lower at 15,790     CAC40 is expected to open 12 points lower at 7,267  

Eurozone retail sales dip further than expected in July Retail sales dropped by -0.2% in July, slightly worse than expected. While this marks a poor start to the third quarter, it does look like the declining trend in sales from recent years is starting to moderate.   The decline in eurozone retail sales was mainly driven by northern economies such as Germany, the Netherlands, Belgium and Ireland, which all posted quite significant drops in retail trade in July. France and Spain actually saw improving sales volumes, and Italy has yet to publish data so far. Overall, today’s data point fits the lacklustre trend in retail sales seen since mid-2021. Since then, we have seen a correction in consumption where services regained consumption share as economies reopened. This came at the expense of goods consumption, which had seen overspending in the early pandemic period. Still, it appears as though we’re seeing an easing of the correcting trend in retail sales. In recent months, it looks like sales have been bottoming out somewhat. This could indicate that the post-pandemic consumption shock is settling and that the improvement in real wages provides some support for the sector battling declining volumes. While it’s still early to draw definitive conclusions, this would be favourable for retail and goods production.

Rates Spark: My home is my castle After the Belgian success story of its one-year retail issue, Italy yesterday announced the launch of its second 'BTP Valore' retail bond for early October. The large volumes involved have knock-on effects on other marketable debt issuance and are a supporting factor for government bond spreads, especially now that the ECB QT debate could pick up.   A stable funding source for governments: households Belgium has grabbed the headlines in recent days with a €22bn one-year retail issue. Beyond the implications for bank deposits, against which it was advertised as direct competition, the success of the sale also had implications for the country’s government bond and bills markets. The net funding via the bills market was reduced from a contribution of €2.8bn to a planned decline in the bills stock of €4.4bn. Long-term bond issuance (OLOs) was trimmed by €2.9bn to €42.1bn for the year.    Yesterday, Italy announced the launch of its second 'BTP Valore', a five-year instrument targeting retail savers. The first instalment launched in June attracted a total volume of €18bn. Such large sizes attract the attention of markets not just for their knock-on effects on issuance plans, but also as it sets the country on a more diversified and stable funding mix. Historically, Italy has had a larger footprint in the domestic market, but it has specifically tapped into the retail segment to a greater degree with dedicated Futura and Valore issues on top of the BTP Italia. At the end of August, these three types of retail government bonds accounted for €122bn or 5.1% of Italy’s central government debt instruments. Prior to the pandemic, the level stood at €78bn or 3.9% at the end of 2019. But since late 2022, households have started to dip more into government debt, raising their investments from €123bn to €185bn over two quarters through the first quarter of 2023. Italian households dipped into government debt again

oday, Italy will sell EUR 3.5-4bn of the new BTP 4% Nov30 and will reopen BTP 3.85% Sep26 for EUR 2.75-3.25bn, BTP 4.5% Oct53 for EUR 1-1.5bn and BTP 5% Sep40 for EUR 0.75-1bn. The auction size will be EUR 8-9.75bn, in line with its endof-August auction. Reopenings for specialists worth EUR 2.4bn will be particularly valuable due to tomorrow’s ECB meeting. Yesterday, BTP Nov30 was trading at 4.15% on the gray market, 6bp higher than the previous benchmark (BTP 3.7% Jun30). We like the new 7Y benchmark in a 5/7/10Y fly, whereas a 3/5Y steepener is appealing in a medium/long-term horizon. With respect to extra-long bonds on auction, BTP Oct53 remains cheap in relative-value terms, reflecting future supply pressure and lower convexity, while BTP Sep40 is fairly priced. A 10/30Y flattener remains an interesting defensive trade from a tactical perspective, especially after the recent steepening. For further information on the auction, see our Primary Market Focus – Italy issues new BTP Nov30 in an appealing area of the curve. Today, Germany will reopen Bund Aug52 and Bund 1.8% Aug53 for a total of EUR 2.5bn. Bund Aug52 was last sold via auction a month ago, whereas Bund Aug53 was last tapped via syndication on 29 August. The deal worth EUR 3bn was well received. Indeed, Bund Aug53 was sold at Bund Aug52 +7.5bp and is now trading 6bp higher, in line with the spread before the transaction. On the other hand, the extra-long end of the Bund curve has underperformed over the past month, with the 10/30Y spread steepening by 5bp to 12bp. Today, Portugal will reopen PGB 1.65% Jul32 and PGB 0.9% Oct35 for EUR 0.75-1bn.    

... as well as in EUR The bear steepening is not confined to the US. In Europe the 10y Bund yield briefly pushed past 2.8% and the 30y hit 3%. Interesting to note is that this happened with longer term inflation expectations actually dropping, so entirely real rate driven. Risk assets of course are not liking it. In European sovereign space this has seen Italian bond spreads over Bunds prolonging their widening leg, taking the 10y spread to 186bp today. But overall widening was a moderate 2bp in relation to the 5bp outright move today, also considering it was largely directional widening since the start of this month. But at the same time that widening over the past week also happened alongside implied rates volatilities coming down, which should normally support spread products. Implied volatility has picked up a tad over the past few sessions but still remain at their lowest since June. In part, it may be the explanation why Bund asset swap spreads (ASW) have remained relatively tight as they mirrored that broader move. That is still notable though, as a lot of the factors traditionally driving the Bund ASW are on the move, and pulling in different directions. Risk sentiment as measured by sovereign spreads has been one factor, but its influence seems muted, with other risk measures like volatility being down. The European Central Bank’s chatter about quantitative tightening has become louder, but the additional effective net supply that a speedier unwinding of the ECB’s bond portfolios implies may take more time to actually realise. More near term, supply could actually still drop, when the German debt agency updates its quarterly funding plan today. And starting next week government deposits currently still sitting on the Bundesbank’s balance sheet will no longer be remunerated and could hence push into the market for high quality collateral.   10Y yields are on long term highs, but the curves still have room   Today's events and market views The data calendar for the US already gets busier with the releases of house price data, new home sales numbers and the Conference Board consumer confidence survey as highlights today. The European data calendar has less on offer but we will see quite a few ECB officials making public appearances, including chief economist Lane and Austria’s Holzmann. Government bond primary markets will stay busier with a 10Y tap out of the Netherlands, a 5Y tap from Germany and Italian short term plus linker auctions. The main highlight will probably be the release of the German fourth quarter funding plan with cuts to the issuance target expected. The UK taps its 10y green Gilt and the US Treasury sell a new 2Y note.

Rates Spark: Bear steepening momentum is unbroken The bear steepening of curves resumed after a US government shutdown was averted and accelerated after better data. Cut discounts are pared as central banks play it safe on inflation. In Europe, Italian spreads recover amid a strong showing on the first day of its retail bond sale.   No excuses to end bear steepening of curves The bear steepening of yield curves has resumed this week. A US government shutdown – which could have provided some excuse for rates to retrace lower – was averted over the weekend. This has meant riskier assets had started off on a firmer footing, but at the same time, higher yields. The 10Y UST rose towards a new cycle high of 4.7% and in Europe, the 10Y Bund yield rose above 2.9%. Obviously, a better-than-anticipated ISM manufacturing as well as some upward revisions in eurozone regional PMIs also helped, but it seems only a matter of time before the 5% and 3% marks respectively are reached. The shutdown story was noise, and though it might still come back to haunt markets later in November, the overarching narrative is that we are still in an environment of elevated inflation. Despite improvements, last week’s core PCE release for September was still close to 4% and the core CPI estimate for the eurozone even a tad higher at 4.5%. With activity not collapsing and labour markets resilient, central banks will try to brush away any hint of rate cuts discussion.     5% UST yield and 3% Bund seem only a matter of time

  Manufacturing PMIs (Nov) – 01/12 –these key indicators have continued to look weak, with economic activity in this sector in Germany and France stuck firmly in contraction territory for the last 16 months. Economic activity in Spain and Italy has been slightly better but even here we've started to see significant weakness. Last week's flash manufacturing numbers saw Germany and France economic activity see divergent fortunes, with Germany edging up from 40.8 to 42.3, while France got worse slipping back from 42.8 to 42.6. As for Italy and Spain, October saw a slowdown to 44.9 and 45.1 respectively, in a sign that while manufacturing had been more resilient initially during the summer months, even here we are starting to see the effects that higher rates are having on economic activity.    

By Michael Hewson (Chief Market Analyst at CMC Markets UK) US non-farm payrolls (Nov) – 08/12 – last month's October jobs report was the first one this year when the headline number came in below market expectations, though not by enough to raise concerns over the resilience of the US economy. Unlike September, when US jobs surged by 297k, jobs growth slowed in October to 150k, while the unemployment rate ticked higher to 3.9%, in a sign that the US economy is now starting to slow in a manner that will please the US central bank. Combined with a similarly weak ADP report the same week, where jobs growth slowed to 113k, and a softer ISM services survey yields have slipped back significantly from their October peaks, as well as being below the levels they were a month ago in a sign that the market thinks that rate hikes are done and has now moved on to when to expect rate cuts. This is the next challenge for the US central bank who will be keen to continue to push the higher for longer rates mantra. It's also worth noting that JOLTS job openings are still at elevated levels of 9.55m, and weekly jobless claims continue to trend at around 210k which means the Fed still has plenty of leeway to push back on current market pricing on rate cuts. Expectations are for 200k jobs to be added in November; however, it should also be remembered that a lot of additional hiring takes place in the weeks leading up to Thanksgiving and the Christmas period so we're unlikely to see any evidence of cracking in the US labour market this side of 2024.          Services PMIs (Nov) – 05/12 –while manufacturing activity in Europe appears to be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation, which is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4. The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The UK economy appears to be more resilient where was saw a recovery into expansion territory in the recent flash numbers to 50.5. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have gone after Italy fell sharply in October to 47.7, while Spain was steady at 51.1.  

Services PMIs expected to remain soft, as RBA leaves rates unchanged By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a rather lacklustre start to the week, weighed down by a rebound in the US dollar as well as weakness in basic resources and energy prices, as investors took a pause after the gains of the past couple of weeks.  US markets fared little better, sliding back in the face of a modest rebound in yields as investors hit the pause button ahead of this week's jobs data, which is due at the end of the week, with markets in Europe set to open slightly weaker this morning.   Earlier this morning the RBA left rates on hold at 4.35% after last month's decision to raise rates by another 25bps. Despite last month's surprise decision to raise rates today's decision acknowledged that inflation was now starting to moderate in goods even as concerns remained about services inflation. Nonetheless, despite this acknowledgement that inflation appears to be slowing there was little indication that the central bank was considering another rate move in the near term. Last month's decision to raise rates was driven by concern about domestic price pressures and while today's decision to hold was a relief there was little sign that a policy change in either direction was being considered with Governor Bullock acknowledging significant uncertainties around the outlook.   Nonetheless today's decision to hold came against a backdrop of a month which has seen 2-year yields decline almost 40bps from their 4.52% peaks on the 1st November, as markets surmised the central bank is now done, with the Australian dollar falling sharply.   The recovery in US yields yesterday appeared to be because of the possibility that the declines seen over the past few days may have been a little too much too quickly, given Powell's comments on Friday last week when he pushed back on the idea that rate cuts were on the cards for the first half of 2024.   There is certainly an element of the market getting ahead of itself when you look at a US economy that grew at 5.1% in Q3 and still has an unemployment rate of 3.9%. The same sadly cannot be said for Europe where the French and German economies could well already be in recession.   While recent manufacturing PMI data in Europe suggests that economic activity might be bottoming out, the same can't be said for the services sector which on the basis of recent inflation data is experiencing sticky levels of inflation. This in turn is prompting a continued hawkish narrative from the ECB despite rising evidence that the bloc is already in contraction and possible recession as well. Recent data from the French economy showed economic activity contracted in Q3 and there has been little evidence of an improvement in Q4.   The recent flash PMIs showed that services activity remained stuck in the low 45's, although economic activity does appear to be improving, edging higher to 48.7. The main concern is that the resilience shown by the likes of Spain and Italy as their tourism season winds down appears to have declined after Italy fell sharply in October to 47.7, while Spain was steady at 51.1, although both are expected to show slight improvements in today's November numbers with a rise to 48.3 and 51.6 respectively.   The UK economy also appears to be showing slightly more resilience where there was saw a recovery into expansion territory in the recent flash numbers to 50.5, while earlier this morning the latest British Retail Consortium retail sales numbers for November, which showed that consumers remained cautious despite the increasing number of Black Friday deals ahead of the Christmas period as retailers looked to tempt shoppers into opening their wallets. Like for like sales in November rose 2.6%, the same as the previous month, with sales of high value goods remaining soft, with consumers preferring to go with lower ticket and essential items spend of food and drink, health and personal care.      In the US we also have the latest October JOLTS job opening numbers which are expected to show vacancies slow from 9.5m to 9.3m, while the latest ISM services survey forecast to show a resilient economy.   The headline is expected to show an improvement to 52.3, with prices paid at 58 and employment improving to 51.4 from 50.2 due to additional holiday period hiring. Gold prices are also in focus after yesterday's new record high saw a sharp reversal with prices closing lower in what looks like a bull trap and could see prices pause for a period of time and retest the $2,000 an ounce in the absence of a rebound.     EUR/USD – continues to look soft dropping below the 200-day SMA at 1.0825, with a break of the 1.0800 having the potential to retest the 1.0670 area. Resistance now at the 1.0940 area, and behind that at last week's highs at 1.1015/20.   GBP/USD – the failure to move above the 1.2720/30 area has seen the pound slip back with support at the 1.2590 area currently holding. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – found support at the 0.8555 area for the moment, but while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – found some support at the 146.20 area in the short term, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 15 points lower at 7,498   DAX is expected to open 9 points higher at 16,413   CAC40 is expected to open 3 points lower at 7,329