Italian political situation improves as negotiations may restart
Financial markets continued to benefit from easing political tensions in Italy after Luigi Di Maio, leader of the 5-Star Movement, said he was ready to go back on his decision to pick economist Paolo Savona for finance minister. Nevertheless, he will stick to Giuseppe Conte for prime minister. The single currency extended gains on Thursday and rose 0.45% to 1.1715 this morning (up 1.75% from yesterday low 1.1519). Italian equities were also better bid with the FTSE MIB rising 0.85% to 21,980 points. Italian sovereign bonds also found a stronger demand: the 2-year yield fell to 1%, compared to 2.8% two days ago, while the 10-year one eased to 2.68%, compared to 3.43%.
After climbing 0.90% yesterday, EUR/CHF rose another 0.25% this morning to 1.1565 amid improving global risk sentiment. The US dollar also paid the cost of improving mood across financial markets. The dollar index extended losses on Thursday morning and hit 93.73.
The immediate future is uncertain now as it is still unclear whether Matteo Salvini, leader of the League, will go back to the negotiation table and form a new government. Indeed, on Wednesday, he called for snap elections and claimed that he did everything he could to help resolve this political impasse but it was never enough for President Mattarella.
However, Mattarella announced yesterday he would give more time to the League and 5-star to form a government and avoid snap election. This is the wiser solution for the President as fresh elections would most likely be beneficial to the two populist parties and would generate more uncertainty regarding Italy’s future. Luigi Di Maio said that in case of no agreement between President Mattarella, the league and 5-stars, he would go for snap elections, which could potentially take place early July.
Strong US, weaker USD
While the market focused on Italy, the US released some interesting data yesterday. ADP for May reported a marginally weaker result than expected 178k verse 190k exp. The BEA dropped Q1 real GDP to 2.2% q/q against 2.3% exp from previously reported 2.3% q/q. Personal consumption expenditure (PCE) was reduced 1.0%, confirming 1Q economic weakness. Despite the softer read, we anticipate a healthy recovery in 2Q as consumer fundamentals were solid. As stated by the ADP release the US labor markets, the bedrock for optimism in household, continue to produce. In addition, overall, economic momentums remain intact and accommodative financial conditions and friendly fiscal policy will support outlook. Core PCE inflation for Q1 revised lower to annualized 1.6% from 1.7% in Q1. The slight reduce will lower Fed rate expectation, allowing risk asset to improve. Finally, Fed Beige Book for the 12-13 FOMC meeting indicate few changes in the momentum of growth outlook. There was a bit of natural softening in consumer activity but nothing that would shift expectations. With outlook for employment and wage growth expected to remain strong but not to accelerate we should see weaker USD on macro backdrop improvements.
