Weekly Economic Insights - 1 October 2018

Macro Highlights - 10/3/2018

Highlights of the week

Economist insights: Upwards revision of public deficit projections in Italy and France, PMI surveys in China

  • In Italy, the presentation of the budget conformed investors’ fears: the 2019 deficit would reach -2.4% of GDP. The forthcoming transmission of the detailed budget to the European Commission...
  • …and Moody’s revision of Italy’s debt rating in October could drive Italian yields up further, without generating contagion to other European countries thanks to the ECB, according to our scenario
  • In France, the government presented, in the framework of its draft budget law, an upwards revision of its projected deficit for 2018 and 2019, but OAT yields should remain contained, according to our analysis
  • In China, PMI surveys showed a further drop in export orders, but confirmed that domestic demand could pick up the slack, which would enable the GDP growth slowdown to remain limited

Focus central banks: There is currently little risk of a further destabilisation of financial markets linked to the Fed pursuing its rate hike cycle

  • While recent data has confirmed the momentum of the US economy, the Fed has raised its key rate by 25bp to 2.25%, as expected
  • Its new forecasts and communication have confirmed however that, despite the robust GDP growth, it does not intend to accelerate the pace of the hikes in its key rate
  • This backs our forecast according to which the Fed would raise its key rate to 2.50% in December and to 3.00% by June 2019
  • The continuation of the monetary normalisation in the US would prevent, according to our analysis, another steepening of the US yield curve, which could contribute to supporting risky asset markets in the US
  • The dollar would continue to appreciate, but gradually, which would limit the risk of renewed international financial tensions
  • Conversely, currency instability should remain high for the emerging markets with the weakest fundamentals, which would maintain a high level of risk of equity market decline in these countries


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