Italian political noise to persist

Emily Nicol
Chris Scicluna

While markets in Japan were closed today for the national holiday, most other major equity indices started the week on the front foot. After some balanced but broadly positive commentary from the PBoC at the end of last week – supporting expectations of further measured rather than aggressive monetary easing ahead – its daily fix for the renminbi was set at 7.0211/$, weaker for an eighth day in a row but still seemingly stronger than market expectations. And with little to upset the mood ahead of week that will bring the latest Chinese economic activity and lending data, China’s CSI300 closed up a firm 1.7% with other regional bourses and US futures stronger too.

Beyond the stock-markets, however, the yen renewed its gradual appreciation trend, moving through 105.5/$. And in bond markets, USTs have just started the week a touch firmer from Friday’s US close, with 10Y yields close to 1.72%. Bunds are little changed ahead of the first estimate of German Q2 GDP on Wednesday, which might well confirm a drop in economic output in the euro area’s largest member state. But following last week’s sell-off, BTPs are firmer ahead of discussions later today among Parliamentary leaders, which should clarify the timetable for a no-confidence vote that will likely put the government out of its misery. With the Johnson government maintaining its stream of policy announcements seemingly aimed at laying the groundwork for a new general election, 10Y Gilt yields have popped up a couple of bps back to 0.50% ahead of some notable UK economic data due from tomorrow through to Thursday.

When Japanese markets re-open tomorrow, attention will be on the July producer price inflation figures for any further insight into the impact of the recent decline in the oil price and stronger yen on import prices. June tertiary activity data, which are likely to report a modest for a second month after a holiday-related surge in April, are also due. June data for machine orders, due on Wednesday, are expected to report a second successive monthly decline. But while total orders are likely to have declined over the second quarter as a whole, core domestic private orders should have grown to suggest an ongoing uptrend in domestic capex. Thursday, meanwhile, will bring final industrial production figures for June, which are likely to confirm the drop of about 3½%M/M that month but positive growth of 0.6%Q/Q over the second quarter as a whole.

Euro area:
With the ruling coalition disintegrating, Italian politics will remain centre-stage this week, although a formal no-confidence vote in the government won’t be held before Friday at the earliest, and seems more likely to come later next week. The timetable should become a little clearer today as Parliamentary leaders are set to meet to discuss a way forward. However, uncertainty will persist as to whether a centre-left Democrats and populists of Five Star can ultimately reach agreement over some form of technocrat government that might prepare a Budget for 2020 – avoiding the marked contractionary increase in VAT that is currently built into the baseline – and thus avoid the early general election that is likely to lead to a right-wing government dominated by Salvini’s League.

Data-wise, meanwhile, Wednesday will be the busiest day of the week in the euro area, with several releases due including the first estimate of German Q2 GDP. Given the weakness in industrial output and construction in the second quarter, as well as softer retail sales growth, a slight drop in German GDP of 0.1%Q/Q is now the consensus, supporting the case for a significant relaxation of fiscal policy at a time when the entire Bund yield curve is in negative territory. Euro area IP data for June due the same day are likely to confirm a notable drop in the second quarter, but the updated estimate of euro area GDP growth due that day is expected to align with the flash estimate of 0.2%Q/Q (half the pace of Q1). Against this backdrop, euro area labour market figures (also due Wednesday) are likely to show only a slight moderation in employment growth in Q2 from 0.3%Q/Q in Q1.

Among other days, euro area trade figures for June (due Friday) should provide some insight into the extent to which net exports weighed on GDP growth in Q2. The first half of the week, meanwhile, will bring final July inflation figures from Germany, France and Spain. Germany’s data tomorrow will be of particular interest given that June’s figures saw revisions to the preliminary release. Moreover, in July, the flash estimates showed a notable discrepancy between the national and EU-harmonised measures, with headline inflation up 0.1ppt to 1.7%Y/Y and down 0.4ppt to 1.1%Y/Y respectively. In the markets, Italy will sell 3Y and 7Y bonds against the backdrop of political turbulence tomorrow, and Spain will sell bonds on Wednesday.

In the UK, this week will bring key figures on the labour market (tomorrow), inflation (Wednesday) and retail sector (Thursday). In particular, employment growth is expected to have picked up in the three months to June, from an equivalent increase of 26.6k in May, not least due to the strength in April (up 434k). So, the headline unemployment rate is expected to remain unchanged at 3.8% in June. Wednesday’s inflation release is expected to show both the headline and core CPI rates moving sideways in July at 2.0%Y/Y and 1.8%Y/Y respectively. But producer price figures are likely to illustrate the disinflationary pressures down the pipeline, not least associated with falling energy prices. But while prices on the high street have also declined over recent months, surveys suggest that retail sales weakened in July – indeed, sales are expected to have declined ½%M/M, albeit only partly offsetting the increase in June. In the markets, the DMO will sell 2049 Gilts tomorrow.

The main US data focus in the first half of the week will be July’s CPI inflation release tomorrow. Despite an anticipated pickup in prices last month, the annual CPI rate is expected to remain comfortably below 2%Y/Y. And the core CPI rate is expected to move sideways at 2.1%Y/Y. A data-packed Thursday will also bring some key releases including industrial production and retail sales figures for July, Q3 productivity and labour costs data, the Philly Fed, Empire Manufacturing and NAHB housing market indices for August and business inventories numbers for June. Friday’s highlight will be the preliminary University of Michigan’s consumer sentiment survey for August, alongside housing starts figures for July.

After data last month suggested improved momentum in China’s economy at the end of Q2, this week will bring a stock-take on conditions at the start of Q3. July financing data are due sometime this week, while Wednesday will bring retail sales, industrial production and fixed investment figures for the same month. The latter are expected to suggest somewhat softer demand at the start of the third quarter.

After the RBA last week reiterated that future policy decisions would depend on developments in the labour market, the main data focus this week will be Wednesday’s wage figures for Q2 and Thursday’s employment figures for July. In particular, despite solid employment growth through the second quarter, the year-on-year increase in wages is expected to remain subdued, unchanged at 2.3%Y/Y for the fourth consecutive quarter. While employment is expected to have picked up slightly at the start of Q3 (up 14k in July compared with a rise of just 500 in June), the unemployment rate is likely to have moved sideways at 5.2%, still well above the RBA’s circa-4.5% estimate of structural rate. Ahead of these data, tomorrow will bring the NAB’s business confidence survey for July, followed on Wednesday by the Westpac consumer confidence survey for August.

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