Italy and ECB to move Europe while US government remains closed

• Confidence vote in Letta government due tonight

• Shutdown continues in DC with little respite so far

• ADP in focus with payrolls data unavailable
  

We are heading for a good, old-fashioned political ding dong tonight in Italy. At around 9pm we are expecting a vote of confidence in the government of Enrico Letta and therefore, the potential fall of said government. The main agitator in all of this is of course Silvio Berlusconi, and it will be the votes of his party that likely decide the outcome. Yesterday we saw a significant ally of Berlusconi, PDL Secretary Alfano, say that party members should vote with Letta and not with Berlusconi. A later meeting between Berlusconi and other party members generated headlines that Berlusconi was sticking to his guns. Has he miscalculated? Or has Letta become yet another cropper of the ‘Godfather’?

Noises from the US haven’t been more heartening however, the near-term risk is delayed somewhat. The obvious fear is that the shutdown drags into the debt ceiling debate. If this should happen, then we are positive that the market reaction will not be as benevolent as recent moves have been.

Yesterday’s market moves reinforced the belief that traders are more concerned about economic data than political machinations at the moment. Yesterday’s ISM number, unaffected by the shutdown as it is released by a private company, showed an improving manufacturing sector. The 56.2 reading was well above last month’s 55.7 with employment, deliveries, inventories and production all moving higher. The full house was avoided however by a slip in the new orders and exports components. USD strengthened through the US afternoon having slipped to 9 month lows earlier in the session.

UK manufacturing continued apace in September and has remained close to the 2.5yr high it made last month. The jobs component was also strong and rose to the highest level in 28 months with new orders also increased, albeit at the slowest rate since May of this year. Continued strength in the manufacturing sector will add to the belief that the UK’s economy is becoming more ‘broad-based’ as we progress through the year, although head winds to this exist in a resumption of Eurozone political issues hurting our largest export market and an increase in the value of sterling that is making all UK global exports more expensive.

That being said, we are looking for demand to remain strong through the rest of the year with the hope that business investment will further galvanize this ‘march of the makers’ as companies take advantage of the Bank of England’s enforced low interest rate campaign.

The overall European manufacturing PMI remained at 51.1 with notable strength seen in the Netherlands but little elsewhere. Growth may be more stable in the short-term but is still very weak. Gains made in European unemployment were also very marginal and, in our eyes, not befitting an improvement in European growth expectations.

Given all of this, we are unlikely to see any movement from the European Central Bank at its October meeting that takes place in Paris this afternoon. Obviously we will be looking to see how Mario Draghi deals with questions around both the prospects of an additional LTRO and what impact the possible political machinations out of Italy might hold for the Eurozone. Italian debt yields haven’t got too out of hand just yet; Draghi will want to make sure he keeps it that way.

As we stated yesterday, the fears around the loss/delay of Friday’s non-farm payrolls announcement have gripped dollar markets in the past 24hrs. In this light you would expect that today’s ADP number will be much more closely scrutinised – the market is looking for 180,000 jobs to be added and a reversal of recent declining levels of improvement.

Have a great day.

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