How concerned are markets about the prospect of another bruising budget battle between Rome and Brussels and/or the possibility that political strife dead ends in Matteo Salvini pulling the plug on the fractious Italian coalition if he can’t get his tax cuts?
Not very, it would appear. Or at least not in the face of the yield grab that’s accompanied the promise of more ECB accommodation and the good mood engendered by the US-China trade truce.
10-year yields in Italy fell below 2% on Monday for the first time since the infamous May 2018 BTP meltdown, a remarkable milestone considering the outlook for the Italian economy is shaky, at best.
Italian stocks bounced solidly in June after tracking global peers sharply lower in May as trade worries proliferated and Salvini ratcheted up the euroskeptic rhetoric ahead of the EU elections, which resulted in a resounding victory for League in the Italian vote.
The economy – which Istat recently warned may contract again in Q2 after climbing out of recession in the first quarter – got some good news on Monday. Unemployment fell below 10%. The jobless rate was 9.9% in May, down from 10.1% the previous month, and better than the 10.3% economists expected. It’s the first time the unemployment rate has been below 10% since 2012.
At the Osaka G20, Premier Conte continued to insist that his government is looking to skirt disciplinary action by the EU. The government is set to hold a cabinet meeting to chat about the 2019 budget on Monday.
Meanwhile, Goldman is now projecting the ECB will cut rates and restart QE at the end of the quarter.
“We expect the Governing Council to opt for a 20bp rate cut with tiering, enhanced forward guidance and a return to QE in September”, the bank wrote over the weekend. “We expect the asset purchases to include corporate bonds and sovereign debt within the existing constraints, paired with a signal that the Governing Council stands ready to expand QE via an increase in the issuer limit if economic conditions do not improve”.