Market Update: Italian coalition talks fail while Eurozone growth slows

Market Update: Italian coalition talks fail while Eurozone growth slows

8th May 2018

Last Week - Key Takeaways

Italian coalition talks fail, setting the scene for fresh elections

  • In a televised address, president Sergio Mattarella said Italy faces either fresh elections or a neutral caretaker government until the end of this year.
  • No single party or alliance won a majority in March’s general election.
  • Italian government bond yields rose sharply on Tuesday in response to Monday’s announcement.
  • The Omnis view: the Italian economy would benefit from significant structural reform, and a strong government is required to make these changes. Omnis funds maintain only small exposure to this country for now.

Eurozone growth slows, but in line with expectations

  • Eurostat data shows eurozone gross domestic product (GDP) growth for the first three months of the year registered at 0.4%, down from 0.7% in the final quarter of 2017.
  • Year-on-year, the growth rate slowed to 2.5% from 2.8%, also in line with consensus expectations.
  • The slowdown may reflect one-time factors that dragged on growth and some bounce-back is likely.
  • The Omnis view: we see this as a short-term blip, with the eurozone continuing to show solid growth in the long term.

US Fed decides against another interest rate rise, with investors now looking to a June hike

  • Federal Reserve policy makers acknowledged recent improvement in inflation, with confidence that it would run close to their 2% objective.
  • The last interest rate rise was in March, with current forecasts for another two increases this year.
  • The Fed’s next policy meeting is on 12-13 June, at which investors overwhelmingly expect a rate hike.
  • The Omnis view: US growth and company earnings remain strong, so we would expect two or possibly three more interest rate rises this year.

Peers defeat government in Brexit vote, while mixed picture in local elections

  • An amendment to the EU Withdrawal Bill giving MPs the power to stop the UK from leaving without a deal, or to make Theresa May return to negotiations, was approved by 335 votes to 244.
  • The government will try to persuade MPs to overturn the change when the bill returns to the Commons later this month.
  • UK local elections suggest little has changed in political landscape with neither Conservatives nor Labour dominant.
  • The Omnis view: Brexit will continue to dominate the headlines in the run up to 29 March, but there is little to suggest Britain’s separation from the EU will be derailed.

No breakthrough in US-China trade negotiations, as second round of talks begins

  • Talks took place in Beijing as officials try to avoid a trade war between the world's two largest economies, following tit- for-tax import tariffs.
  • China has said that progress was made, but acknowledged that the two sides remain far apart on some issues.
  • Chinese President Xi Jinping's top economic adviser, Liu He, is due in Washington to continue discussions.
  • The Omnis view: tensions have eased since the first tariffs came into play earlier this year, and we would expect an amicable agreement, eventually.

Looking Ahead - Talking Points

Bank of England likely to hold interest rates at May meeting

  • Bank of England’s Monetary Policy Committee meets on Thursday, but a rate hike is unlikely as weak growth and low inflation remain.
  • An August move is also in doubt, with UK gross domestic product (GDP) coming in at 0.1% for the first three months of the year.
  • Markets have priced a 92% chance there will be no change on Thursday, a major reversal of sentiment from a month ago when speculation was at 98% chance of a rise.
  • The Omnis view: While Brexit-related uncertainty continues to cast a shadow over the UK economy, solid global growth should continue to be supportive. Nonetheless, the outlook for the UK economy does not, in our view, merit higher interest rates.

UK inflation rate (%) – 2008 to 2018

Bulletin - 080518 1

Source: Office for National Statistics, tradingeconomics.com

US consumer price data to give clearer signs on pace of inflation

  • On Thursday, the Commerce Department will publish Consumer Price Index (CPI) data for April.
  • Market analysts expect consumer prices to post a gain of 0.3%, snapping back from March's 0.1% decline.
  • Core CPI data - excluding food and energy - is also released, and this is projected to have climbed to 2.2% on a yearly basis.
  • The Omnis view: Reported rates of inflation are expected to jump as last year’s fall in the costs of mobile phone contracts drops out of the year-on-year comparison. However, a material rise in inflation would be a catalyst to push the Federal Reserve towards raising interest rates at a faster pace than currently expected.

US monthly inflation rate (%) – April 2017 to March 2018

Bulletin - 080518 2

Source: US Bureau of Labour Statistics, tradingeconomics.com

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