“Italy And Its 2019 Budget…”

Italy And Its 2019 Budget

The Italian cabinet on Monday signed off on an expansionary 2019 budget, boosting welfare spending, cutting the retirement age and hiking the deficit.  The budget is not in compliance with EU rules and creates a showdown with Brussels.    The government of the right-wing League and the anti-establishment 5-Star Movement had already issued the financial framework for the budget, raising the target for next year’s deficit to 2.4 percent of gross domestic product.  The Commission will now assess the fiscal framework, dismiss it and ask Rome to draw up a new one.   The League and 5 Star say they will not go back, arguing that their big-spending budget is needed to boost growth and tackle rising poverty in Italy.  According to the Commission, the budget will push up Italy’s public debt which stood at 131 percent of GDP last year which is higher than that of Greece.  The Commission rejected Rome’s argument that the budget can lower debt by expanding the economy.  The spread between the yield on Italy’s benchmark 10 year bonds and that of the German equivalent stood at just over 3 percent on Monday quite stable when compared with the level it hit at the end of last week.  Meanwhile, on Tuesday Italian government bond yields dropped across the board narrowing the spread over the German peers, after Economy Minister Giovanni Tria defended the budget for 2019.   Tria was confident he could explain to the European Commission that Italy needed to raise spending to offset a slowing economy, and described the 2.4 percent deficit target as “normal”.  He is seen as a moderating influence in the government.

Brexit

British Prime Minister Theresa May, on Wednesday assured EU leaders that she can still reach a Brexit deal, avoiding a showdown over stalled talks at the weekend, over how to manage the Irish border as Brussels stepped up the plans for a failure of negotiations.   She also said Britain was open to extending the transition period after the UK departs the European Union, although she did not think it would ever need to be used.  She reiterated those comments on Thursday. For now a planned summit in November that would mark the signing of an agreement was cancelled.  Instead May will get some more weeks to resolve the domestic political troubles which most EU leaders believe are the real obstacle to a deal.

Inflation Drops In The UK

Inflation in the UK fell more than expected in September to a three month low, with some relief to consumers, as they felt squeezed financially since the Brexit vote.  Consumer prices rose at an annual rate of 2.4 percent, according to the Office for National Statistics (ONS).  These figures are likely to assure Bank of England officials whose forecast in August for the period July to September averaged around 2.5 percent.  On Tuesday the ONS said the basic wages of workers had risen at their fastest pace in nearly a decade over the summer months.  But the wage growth of 3.1 percent remains inadequate by historical standards, when adjusted for inflation.  The Bank of England is expecting inflation to fall but stay just above its 2 percent target in two years’ time as it gradually raises borrowing costs.  Meanwhile, consumer price inflation hit a five-year high of 3.1 percent in November, when the effect on the pound due to inflation after the Brexit vote in June 2016 reached its peak.

Federal Reserve Minutes

The Federal Reserve Minutes for the most recent policy meeting held on 25^th and 26^th September show that policymakers are largely united on the need to raise borrowing costs despite President Trump’s view that interest rate hikes have already gone too far.  Every Fed policymaker backed the central bank’s decision to raise the target policy rate between 2 and 2.25 percent.  The minutes showed that, participants in the Fed’s rating setting committee “generally anticipated that further gradual increases” in short-term borrowing costs “would most likely be consistent” with the kind of continued economic expansion, labour market strength, and firm inflation that most of them are anticipating.  The minutes further showed that “this gradual approach would balance the risk of tightening monetary policy too quickly which would lead to an abrupt slowing in the economy and inflation moving below the Committee’s objective, against the risk of moving too slowly, which could engender inflation persistently above the objective and possibly contribute to a build-up of financial imbalances.” The united front of the policymakers could bolster expectations that the central bank will raise rates a fourth time this year in December, however the minutes also show that the committee remains split on how much further to raise rates next year.   Meanwhile, Trump told Reuters in August that he was “not thrilled” with Fed Chair Jerome Powell  for raising interest rates and since then he escalated his criticism saying the central bank is his “biggest threat”, calling also the FED “crazy” and “ridiculous”.    The US economy has been growing fast this year than is believed by economists to be possible, without generating higher inflation, and with the jobless rate at its lowest level in decades.  The Federal Reserve has been raising interest rates since 2015 and after the rate hike last month, it stopped describing the monetary policy as “accommodative” that is it no longer thought the level of interest rates was stimulating the economy.

China’s Inflation

China’s yuan weakened as inflation data shows softer demand.  This raises the likelihood of further policy easing by the central bank to keep growth on track.  The currency fell despite the People’s Bank of China set the midpoint of the currency’s daily trading band slightly stronger than a day earlier at 6.9119.  Analysts expect that further policy loosening, such as with additional cuts to banks’ reserve requirement ratios, would add to downward pressure on the yuan.  The fourth cut this year to the banks’ Reserve requirement ratios went into effect on Monday.  The Producer Price Index (PPI) increased by 3.6 percent in September from a year earlier, down from a 4.1 percent in August and slowing for a third straight month according to data released by the National Statistics Bureau on Tuesday.  Over the weekend the People’s Bank of China Governor Yi Gang said he saw plenty of room for adjustment in interest rates and the banks’ reserve requirement ratio, due to significant risks from the trade war.

China’s And Japan’s Treasury Holdings

China’s holdings of US Treasuries fell for a third straight month in August to their lowest in more than a year, according to the data released by the Treasury Department. This move was likely  to support  its currency in the face of emerging market volatility.   Data show that China’s Treasuries’ holdings fell to $1.165 trillion in August, from $1.171 trillion in July.  China, however, remains the largest non-US holder of Treasuries.  In August, when the trade war between China and the US escalated, the concern was that China would retaliate by cutting its vast holdings of Treasuries.   Similarly, Japan’s holdings of Treasuries also dropped in August to $1.029 trillion (July $1.035 trillion), the lowest since October 2011.  Data also showed foreigners bought more than three times as much in US Treasuries in August than in July, posting the largest inflow since June 2015.  Purchases of Treasuries totalled $63.13 billion in August, up from $18.94 the previous month.  Treasury inflows were led by private investors, who bought $55.57 billion.

Market Recap

As trade tensions persisted, on Monday the Japan’s Nikkei and China’s bourses tumbled overnight, the Euro Stoxx 600 index hit a 22-month low and US markets reopened a fraction lower after their worst week since March.   The broader global picture was of a cautious one and the lack of confidence continued to boost the demand for traditional safe haven assets.    On Tuesday, Wall Street surged more than two percent supported by strong corporate results and economic data, while the dollar and the treasury yields were little changed. The S&P 500 also posted the biggest daily gain since late March.    On Wednesday, a gauge of stocks internationally edged lower as the outlook on earnings soured after a warning on the European auto sector and a revenue miss from IBM.   On Wall Street, IBM fell 7.4 percent dragging blue-chips lower a day after the company missed revenue expectations.

Oil

Oil rose on the expectations of disruption in supply due to US sanctions on Iran and tensions with Saudi Arabia.  US Senator Lindsey Graham accused Saudi Crown Prince Mohammad bin Salman of ordering the murder of Saudi journalist Jamal Khashoggi and said the prince was jeopardising relations with the United States. The unexplained disappearance from the Saudi embassy in Istanbul of prominent Saudi journalist and dissident Jamal Khashoggi remained in the headlines as Saudi King Salman ordered an internal probe into the case.  This was taken by traders as a sign for driving oil prices further up.    Brent crude responded by jumping 1 percent whilst Saudi stocks recovered the full 3.5 percent they had lost on Sunday when the diplomatic tensions flared.    Market participants also said that US crude prices were being pressured by recent stock builds at Cushing, Oklahoma, where inventories have increased for three straight weeks.  Brent crude rose 0.69 percent to $81.34 a barrel, while West Texas Intermediate crude was up 0.14 percent at $71.88 a barrel.  On Tuesday, OPEC Secretary-General Moahammad Barkindo urged oil producing companies to increase capacities and invest more to meet future demand as spare oil capacity shrinks worldwide.  In its September report OPEC said that crude oil demand is expected to increase by 14.5 million barrels per day from 2017 to 111.7 million bpd in 2040.  Saudi Arabia is the only oil producer with significant spare capacity on hand to supply the market if needed, and plans to invest $20 billion in the next few years to expand its spare oil production capacity.

Currencies

At the beginning of the week the Euro climbed as high as $1.16 despite a humble regional election result for Chancellor Angela Merkel’s conservative Bavarian allies on Sunday.  The British pound edged lower on Wednesday before a monthly inflation report.  Meanwhile, the Turkish lira was another big riser jumping 1.5 percent to its highest since mid-August after US President Donald Trump praised the release of US pastor who has been under house arrest in Turkey.  Investors hope his release can lead to an improvement in US-Turkey relations.  On Tuesday, labour data released beat expectations which pushed the pound higher and briefly redirected attention away from ongoing Brexit negotiations and back to the UK economy.   Sterling on Tuesday rose as high as $1.3235 as data showed that British workers’ basic wages rose at their fastest pace in nearly a decade over the summer months trading on Wednesday at $1.3156 down 0.2 percent.  Meanwhile, the dollar hit its three week low on Tuesday as data showed US retail sales barely rose in September.   While the dollar struggled against its developed market peers it managed to strengthen against emerging market currencies and pinned the Chinese yuan to a two-month low.  The Euro held around the $1.1573 against the dollar after the Italian Cabinet signed off on an expansionary 2019 budget, which is not in line with EU rules.  The single currency rose against the Swiss franc suggesting supportive risk appetite for Eurozone assets.    On Wednesday, the US dollar rose as the market awaited the minutes from the latest Federal meeting while lower than expected inflation data weighed on the sterling.  On Thursday the British pound traded flat as Theresa May confirmed she was open to discussing an extension of the transition period after Brexit.  The pound was steady at $1.3114 after earlier falling to $1.3076 although it briefly took a hit after data showed UK retail sales fell by the most in six months in September.

Company news:

Goldman Sachs

On Tuesday, Goldman Sachs reported a better-than-expected quarterly profit  driven by its equities trading and investment banking businesses that offset weakness in bond trading.   The bank said that fixed income, currency and commodity trading revenue fell 10 percent to $1.31 billion.  Goldman is typically more sensitive to the swings in market volatility than its peers because its large trading business overshadows its other banking units.  Net earnings attributable to common shareholders rose to $6.28 per share in the third quarter ended 30 September.

Morgan Stanley

Morgan Stanley (MS) beat the estimates for quarterly profit on Tuesday as higher revenue from trading in stocks and strong equity underwriting outweighed the weakness in the bond trading and advisory businesses.  MS’s total revenue rose 7.3 percent to $9.87 billion.  Net income attributable to Morgan Stanley rose to $1.17 per share, in the third quarter ended 30^th September from 93 cents per share a year ago.

Johnson & Johnson

Johnson & Johnson on Tuesday reported quarterly profit above estimates and raised its full-year forecast, as demand for its cancer drugs Zytiga and Imbruvica helped offset the decline in the sales of drug Remicade.  The healthcare conglomerate’s net earnings rose to $1.44 per share, in the third quarter from $1.37 per share a year earlier.   Sales rose 3.6 percent to $20.35 billion above analysts’ average estimate of $20.05 billion.

Malta:  Labour Supply in Malta

In 2017, the total number of employed persons in Malta amounted to 232,169 an increase of 5.7 percent when compared to the previous year. Labour supply is composed of persons in employment and those registering for work.

Malta:  Retail Price Index:  September 2018

In September 2018, the annual rate of inflation as measured by the Retail Price Index (RPI) was 1.64 percent, up from 1.12 percent in August 2018.  The largest upward impact on annual inflation was measured in the Food index, while the largest downward impact was recorded in the Clothing and Footwear Index.

Malta:  Government Issues New White Paper On Rental Reform

The government issued the long awaited consultation document on Rental Reform.  At a glance, the white paper does not propose caps on initial rents.  It proposes to tackle the uncertainty of short term leases either through mandatory minimum leases or financial incentives for contracts longer than a year.   The paper also suggests regulated rent increases in line with property index.  The changes will be regulated by a new department within the Housing Authority whose role will be to oversee the market and will be responsible for registration and enforcement issues.  The paper includes measures aimed at increasing the availability of affordable rental properties within the EUR 400 to EUR 700 per month range, mainly through partnership with the private sector.

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