What will Eurozone sentiment indicators show?

Focus:EZ PMI, ITregional elections

EZ: Are rising new COVID-19 infections weighing on mood?

A first flash estimate of the September Purchasing Managers' Indices (PMI) for the Eurozone, Germany and France will be released next week (September 23). In August, sentiment in the Eurozone services sector cooled down markedly, after a sharp rise in July. The rapid increase in new COVID-19 infections in Spain and France understandably weighed on sentiment in the services sector.

Given the steady rise in COVID-19 infections in France and Spain in September, we expect the mood in the services sector to be subdued. In contrast, sentiment in the industrial sector could brighten slightly, as the trade recovery continues on the global level. Overall, the recovery in 3Q has so far been better than generally expected. As a result, institutions such as the ECB and OECD have recently raised their GDP forecasts for the Eurozone for 2020 slightly.

IT: regional elections are an important barometer of public opinion

On September 20-21, elections will be held in six different regions of Italy (including Veneto, Liguria and Tuscany). In addition, the whole country is expected to approve the resizing of the Parliament from 630 to 400 members, which was already decided by the Parliament last year.

The regional elections will be an important indicator of the approval that the current government, made up of Social Democrats and the 5-star movement, has with the population after the corona crisis. It remains to be seen whether Italy's governing parties will be able to benefit from negotiated EU aid worth EUR 65.5bn (around 3.7% of GDP) from the EU recovery plan. While the Social Democrats won the last regional elections in Emilia- Romagna at the beginning of the year, the 5-star movement suffered a bitter defeat.

A good performance by the right-wing populist camp (Lega and Brothers of Italy) could be a threat to the stability of the government. Nationwide, the Lega continues to lead in opinion polls, ahead of the Social Democrats. However, in recent months, the Lega has suffered heavy losses in favor of the Brothers of Italy. The Brothers of Italy owe their rise to their charismatic party leader Georgia Meloni (former minister of justice), who could outstripp Salvini, the head of the Lega, in the right-wing camp.

In view of the bad experience with the Lega party during their last participation in government, the regional elections are being closely monitored in Brussels as well. However, due to the ongoing comprehensive monetary policy support by the ECB (APP and PEPP purchase programmes), we believe that even if the right-wing parties win the elections, a rise in risk premiums for Italian government bonds is currently unlikely. On October 23, rating agency S&P will publish an update on Italy. S&P currently rates Italy as BBB, but the outlook is negative.

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