Steeper JPY yield curve and Italy's deficit targets for 2020 as expected
|Market movers today
This morning, we have published our quarterly Nordic Outlook with updated economic forecasts for the Nordic countries. We have downgraded the growth outlook for 2020 for all countries in line with our more negative take on the global economy.
In terms of economic data releases, focus is on preliminary HICP inflation in September in the euro area. The combination of sliding inflation expectations and core inflation hovering around 1.0% in the last two years, despite a decent pick-up in wage growth, is challenging the ECB's credibility. With energy price inflation falling further into negative territory and core inflation stuck at 1.0%, we expect headline inflation to print at 0.9%.
Today, we get PMI manufacturing for most countries including Norway and Sweden. We expect PMI manufacturing to fall in Norway (see below), Sweden and the UK but we could see a small pickup in the US ISM manufacturing index in line with the Markit PMI and regional PMIs.
The UK Conservative Party Conference continues today so look out for any Brexit related headlines.
Note we are hosting a short conference call (30 minutes) on the risks of a forthcoming global recession at 10:00 CEST today.
Selected market news
Yesterday the BoJ signalled further willingness to re-steepen yield curves, as the October purchase plan under the QE programme showed cuts to purchases in maturities longer than 3 years and even showed a potential end to purchases above 25y maturities. On top of this, Japan's Government Pension Investment Fund in a statement this morning said that it would re-categorize FX hedged foreign currency bond holdings into domestic debt, effectively freeing up JPY 1.3tn, that the fund can now invest in foreign debt. JGB yields are generally higher this morning as the curve steepens 5-6bp 2s10s. The 2s10s curve is at its steepest level since February. It will be interesting to see whether the recent curve steepening can remain intact despite a lack of inflation and growth expectations.
The first step in Italy's draft budgetary plan (which is to be submitted to the Commission and Eurogroup no later than 15 October) was approved yesterday evening in the Cabinet - as expected a deficit/GDP at 2.2% and real GDP growth of 0.6% for 2020 is targeted. The target will, according to the Ministry of Economy, bring down the debt-to-GDP ratio from currently 136% to 131% by the end of 2022, however, the structural deficit will widen by 0.1 ppt. instead of improving the balance by the committed 0.6 ppt. Also, the planned sales tax hike is avoided for 2020, which has been a key promise for premier Conte.
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