Italy’s Deficit Projection Likely Below EU’s 3% Limit

Fundamental analysis of Forex market

Market movers today

As the Brexit end-game has started, we have published an update this morning looking at the status of the negotiations, what the possible outcomes are, what the biggest obstacles are and what we expect of the economy and GBP. For details, see Brexit Monitor: Get ready for the end game, 27 September.

The big event today will be Italy publishing growth, debt and deficit projections for 2019. We expect 2019 to land somewhere between 2.0-2.4% of GDP, i.e. not violating EU rules. The budget is likely to include some kind of tax reforms and citizen income, but policies are likely to be phased in only gradually or implemented by tweaking some already existing schemes in order to avoid the deficit breaching EU rules.

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Overnight in China, we will get the Caixin PMI manufacturing for September. PMI has held up surprisingly well despite the trade war and sharp decline in stock markets and metal markets. However, we see clear downside risk as other data also points to a slowdown. We expect a decline to 50.3 in September from 50.6 in August.

Overnight in Japan, we will get data releases on the labour market regarding the unemployment rate and jobs/applicants ratio for August. The labour market has turned increasingly tight in recent years and we have seen signs that this is pushing up wages. It will be interesting to see if pressures continue to increase.

Selected market news

The Fed meeting turned out pretty much in line with what we wrote in our preview, as the Fed raised the target range by 25bp to 2.00-2.25% and did not send any new important signals to the markets, supporting our view that the Fed is on autopilot and that neutral is the destination. We believe hikes in December, March and June are quite likely, which would take the Fed funds rate to 3.00%, which is the Fed’s long-run estimate of where monetary policy is neither expansionary nor contractionary (increased from 2.875% in the June projections, also not a big surprise). For out take, see FOMC Review: Gradual Fed hikes are set to continue , 26 September. Overnight, Trump repeated that he is ‘not happy’ with the Fed hikes as they are offsetting his fiscal policy (see Bloomberg ), which the Fed, however, is likely to continue ignoring.

China has announced it will lower tariffs on a range of imports effective from November , as it tries to put pressure on US President Trump by opening up the Chinese markets gradually. This should lower the average tariff rate to 7.5% form 9.6%. We do not expect this to change Trump’s strategy short term, as the US economy is strong and optimism is high , and there is still a significant risk that the trade war may escalate further in coming months. For more details on our view on the trade war, see US-China Trade Update, 17 September.