Italian marketing games (Daily analysis 3.10.2018)

The Italian government, after the reaction of the EU officials, came back to reality and presented the revision of the budget deficit estimates for the following years. However, the changes are marginal and they clearly do not impress investors. Again, average data from the eurozone. The zloty remains under slight pressure. Today's MPC conference will probably not change much in the context of the Polish currency.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 2:15 p.m.: ADP data on private-sector employment change in the USA for September (estimates: 184 thousand).
• 4:00 p.m.: ISM index from the US services sector for September (estimates: 58 points).
• 4:00 p.m.: Beginning of the press conference after the MPC meeting and publication of the statement.

Marketing is not enough

At night, there were reports from the Italian press (Corriere della Sera) that the Italian government had reflected and lowered its forecasts for the public finance sector deficit. However, the news that followed was not as optimistic. The change is marginal, and only from 2020. The original assumption was that the gap in state finances would amount to 2.4% of GDP in the next three years, and now it is 2.2% in 2020 and below 2% in 2021. It is not clear how spending was reduced or how income was increased, but it is not excluded that the prospects for economic growth have been even more "coloured".

These fears may be confirmed by reports from Il Sole. According to the newspaper, the economic growth forecasts for 2021 assume that the economy will grow by 1.7%. Such optimistic estimates seem completely unrealistic. During the height of the current economic situation, the Italian economy grew at a rate of 1.6% (2017). In the last 15 years, the situation occurred only once when it exceeded 1.7% (2007). There are no arguments confirming the GDP growth forecast of 1.7% in 2021 (e.g. IMF forecasts estimate growth at 0.8%).

The market quickly realised that Italian assurances are more a marketing proposition than a real sacrifice. These are unlikely to happen, as the current coalition has to fulfil most of the election promises. Otherwise, it will simply disintegrate. Trying to combine both aggressive social elements (guaranteed income) and liberal elements (flat tax), it is inconsistent both ideologically and economically. With low potential for economic growth, the low economic activity of citizens, poor education and too generous pension system, this policy does not present any chances to improve the productivity of the country, but only increases the risk of increasing debt.

As a result, yields on the Treasury bonds maturing in 10-years returned to around 3.4%, even though they fell below 3.3% in the morning. The situation was similar for the single currency. Night reports pushed the EUR/USD pair close to 1.1600, but before midday, the exchange rate fell to 1.1560. The persistence of threats to the euro related to Italy and the negative reaction of the euro to these reports are still the baseline scenario.

Apart from reports from Italy, it is worth noting today's macro data from the USA. Yesterday, Amazon announced that the minimum hourly wage in the United States would be 15 USD. This may increase the chance of accelerating wage growth throughout the economy in the coming months. In the afternoon, the data on new payrolls in the US economy in September will be published and we will know whether the ISM index for the service sector has remained at decent levels (around 58 points). If the data is good, the dollar should be supported.

Zloty remains stable but it is slightly weaker

The continuing fears about the Italian economy, and the economic situation of the entire European Union are putting pressure on the zloty. The euro is close to the PLN 4.30 limit, and the dollar remains slightly above 3.70 PLN. A strong sale of the zloty should not be expected, but the current or even slightly higher values of the dollar or the euro may be observed in the following days.

With regards to domestic events, it is worth remembering today's meeting of the Monetary Policy Council. The Council is very likely to discuss both of the events in Italy, as well as the strong increases in oil prices. Inflation published by the Polish Central Statistical Office (GUS) is still clearly below the target (especially core inflation), so the lack of changes in monetary policy for the next few quarters will be suggested by the MPC. The zloty should not overtly react to the message from the central bank.