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In Less than 1500 Characters


Fed: It's Likely to Be 25


at 08:13AM

Our understanding at this point is that, even if the most recent non-farm payroll data points to a buoyant job market in the US, the Federal Reserve is still poised to cut rates by 25 basis points at its July 31 meeting.

We believe that Chair Jerome Powell will hint at just that in his Humphrey Hawkins Congress Testimony on Wednesday July 10. And last week's job data, if anything, made his life easier by scraping away some of the excess dovishness in market pricing (35 basis points in mid-June, 32 before the NFP data was released last Friday).

The Fed is also likely to announce a revised path for possible future cuts. From what we have been told, there is a lot of sensitivity in the upper echelons to President Donald Trump's new focus on currency wars.

To be clear, the Federal Reserve will not act because the President said so. But external conditions, and in particular the prolonged trade stand-off with China (and the upcoming one with the EU) may have convinced the Board of Governors to take into account certain issues that had been previously overlooked, such as the exchange rate.

All in all, we expect the combination of financial conditions on both sides of the Atlantic to provide support for EURUSD, as markets are likely to find out soon that, despite the selection of Christine Lagarde as the next ECB President, the Fed has much more room to act compared to the ECB.

Italy: No End in Sight for Yellow-Red Government


at 12:48PM

While Italy has been by and large outside of investors radars lately, and BTPs have performed well after the demise of League leader Matteo Salvini and the formation of a more market-friendly executive, we believe the upcoming regional elections in Emilia Romagna on January 26 are likely to attract markets attention.

We expect BTPs to come under pressure as the vote gets closer, but we are confident that the government will survive and therefore would advise to be patient and wait for the storm to pass.

Our understanding is that the risk that

the Democratic Party, which has governed the region since the end of World War II, might lose against a well-organised center-right coalition is real. But from what we hear from PD officials, this is unlikely to cause the government to collapse.

Indeed, we have been told that the current party secretary - Nicola Zingaretti - is banking his entire legacy on the coalition's survival, and is hoping to avoid snap elections until 2022, when President Sergio Mattarella's successor will have to be elected. Zingaretti hopes that the current Parliament could elect someone like former ECB President Mario Draghi, or any other market friendly figure that would keep the populist right under check.

EU Fiscal: Time for Reflation? Not Quite
11/07/2019 at 03:46PM

A recurrent theme of the past few months - especially on the US side of the Ocean - is that markets should get ready for a reflation trade, with government bond yields finally rising and the end of the low inflation era.

But at the risk of sounding overly bearish, we are convinced that is just a convenient assumption that the resolution - better, the subsiding - of the trade conflict between the US and China will immediately trigger a revamp of Europe's export manufacturing.

In fact, the European Commission's recently updated EU growth forecasts point to weak growth - especially in big manufacturing countries such as Germany and Italy - in 2020 and 2021. This, in turn, will make it much harder for the ECB to hit its "below, but sufficiently close to 2%" monetary policy target.

This would be a good time for (certain) European countries to start opening the fiscal taps, but the odds of that are small.

In fact, the debate over whether single countries, or the EU as a whole, or both, should implement a decisively expansionary fiscal policy is still very much alive. Our sense is that there is more to the "European solution," even though it's likely to be small and, as usual, disappointing for investors expecting a big investment package.

Overall, however, the fiscal effect is likely to be underwhelming, which leaves Europe potentially with a near future of low growth and low inflation. Not quite the reflation that investors expect.

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