- Modest day for statistics dominated by surveys, focus on US and Italy
surveys; Italian political crisis likely to ride roughshod over other
inputs; numerous ECB speakers also on hand
- Italy: fresh elections on their way, but thick fog on timing; ballooning
BTP spreads testament to long held and colossal market complacency
on risk premiums
- US Consumer Confidence: marginal dip from multi-decade high expected,
gasoline price rise suggests risks skewed to the downside, despite
strong labour demand
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** EVENTS PREVIEW **
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As Italy's government crisis continues to unfold and dominate the headlines, there is a rather modest run of heavily survey dominated data, which will find its focal points in the monthly economic confidence surveys in Italy, ahead of this afternoon's US Consumer Confidence, with the overnight Japan labour report along with Eurozone M3 and lending aggregates likely to be no more than statistical roadkill. There are a large number of ECB speakers, the OECD Forum gets underway in Paris and features Macron and US Trade Secretary Ross, while Canada PM Trudeau gives a key note speech on a wide range of topics, likely to include NAFTA and local hot topic du jour in Canada, namely oil pipelines.
** Italy - Politics **
- President Mattarella's weekend decision to reject Savona as the Lega/M5S choice for Economy minister, and the ensuing collapse of that proposed coalition government leaves Italy in a fog, with the subsequent nomination of Cottarelli as the caretaker PM needing to overcome the seemingly very high hurdle of a parliamentary vote of confidence. The latter has initially indicated he would want to oversee the passage of a budget for 2019, and presumably an electoral law reform, and thus stay in power until the first quarter of 2019. While it is not impossible that he might win the vote of confidence, stranger things have happened before in Italian politics, it is more likely that he will be rejected, and then the question is whether Lega/M5S would want to support an electoral reform bill that would see a return to a two round system, implying a new election would take place in Q4, and would be rather different from March in so far as the need for pre-election pacts, such as the Forza, Lega and Fratelli d'Italia one, would be much reduced. Be that as it may, otherwise an election conducted under the current Rosatellum electoral law in Q3 would seem inevitable, and would almost certainly be a histrionic screaming match between the 'establishment' (who will be termed vassals / agents of Brussels and Berlin) and the anti-establishment, i.e. Lega/M5S, who presumably be touting their govt contract as their manifesto (and thus be subject to similar taunts of being purveyors of economic self-destruction for Italy, as was the case during the Brexit referendum). Inevitably such an electoral scrap would be deemed to be a case of life or death for the Euro, above all in the English speaking media. The latter misses the point that this kind of narrative would leave the Italian voting public with no clue about what might emerge for them in terms of the economy (cf. the Brexit negotiations shambles). Populists (in Italy and the usual array of non-domestic pontificators posing as guardians of the voting public, and purveying their familiar brand of cognitive dissonance) are arguing that Mattarella should be impeached for not respecting the public vote, but that is in fact a falsehood - Savona did not stand in the election, therefore the president has every right to 'vet' him, and given that neither Lega nor M5S's election manifestos / platforms argued for exiting the EUR, let alone the EU, Savona's views are clearly incompatible with what the public voted for. Be that as it may, what now ensues in this very Italian constitutional crisis should be bear various hallmarks of Julian betrayal, Machiavelli and the Borgias. In market terms, the sharp rise in BTP yields and widening in BTP spreads is a point lesson in markets having been enormously complacent and absent of any risk premium for far too long; also take a look at the attached chart of which foreign banks have the largest exposure to Italian debt (govt and corporate), which will doubtless be an increasingly hot topic.
** U.S.A. - May Consumer Confidence **
- Consumer Confidence is seen edging lower to 128.0 from 128.7, but still remain very close to April's seventeen year high. The risks look to be distinctly to the downside of the consensus, even if the latter clearly accords considerable weight to strength of the labour market, and the labour differential should bear this out (April 22.9). That said US equity markets have been rather wobbly, but more importantly, and notwithstanding crude oil's recent tumble, average US gasoline prices are close to $3.00, up 12-17 cents on the month, and 60 cents, i.e. 25% from a year ago, just as the US enters its 'driving season'. That rise probably accounts for some of the sizable dip in Michigan Confidence from its provisional to its final reading, and will likely find some resonance in today's survey. From a broader perspective, how gasoline prices evolve between now and November will have a bearing on the outcome of the mid-term Congressional elections, which is implicitly what Saudi Arabia and OPEC Secretary General Barkindo were saying when they announced that OPEC and Russia were looking at easing production curbs. Of course it is equally no surprise, that Saudi Energy Minister al-Falih was quick to announce that the Aramco IPO has been postponed to 2019. As for Russia, its oil and gas behemoths have been voicing their resistance to the curbs for more than six months, indeed Gazpromneft's CEO only last week suggested that crude prices are likely to settle back into a $50-60 range.
from Marc Ostwald
