In today’s briefing:
- Euro Watch: A Conflict of Interest Emerging Between ECB and Italy
- Global Earnings on the Edge: A Concise Analysis of Key EPS Indicators
- UK: The Exceptional Inflation Nation
- US Default Unlikely, but This Is Just Round1 of Prolonged Debt-Reducing Negotiations
- Germany 2 and 10-year Yields Show Signs of Breakout
Euro Watch: A Conflict of Interest Emerging Between ECB and Italy
- A conflict of interest is emerging between Italy and ECB, as Italy needs funding in the middle of a hiking cycle
- Italy needs to refinance roughly 650 bn. EUR within the next year
- Will the central bank scoop up the debt, or will banks and households have to step in?
Global Earnings on the Edge: A Concise Analysis of Key EPS Indicators
- Our aggregate bellwether earnings indicator point to a 20% decline in global earnings-per-share.
- This contrasts sharply with market expectations, which continue to project earnings growth in all major regions.
- Combining our earnings estimate with current global equity market valuation also results in significant downside.
UK: The Exceptional Inflation Nation
- Inflation slowed by much less than expected again in Apr-23 to 8.7% on the CPI (RPI 11.4%). That 0.4pp CPI surprise extends a worrying trend in the UK.
- Broad strength across core goods and services means underlying inflation increased again while other countries slowly converged toward their targets.
- State-Sponsored second-round effects are creating painful inflationary exceptionalism in the UK. We now expect a 25bp rate hike in August beyond our existing June call.
US Default Unlikely, but This Is Just Round1 of Prolonged Debt-Reducing Negotiations
- The Gramm-Rudman-Hollings process was initiated in 1987 when US public debt was just 50% of GDP. It is now 123% of GDP. Serious, protracted deficit-reduction negotiations are therefore imperative.
- Biden and McCarthy know the chaos that any hint of default will sow. They will take these talks to the brink, but the debt-ceiling will be lifted by mid-June.
- Medium-Term spending cuts should bring annual deficits down to 3% of GDP by FY2024 (30Sep’24). Despite near-term messy uncertainty, lower deficits will reduce bond yields and be positive for markets.
Germany 2 and 10-year Yields Show Signs of Breakout
- Yesterday, the yields closed almost unchanged despite two consecutive higher highs.
- However, if the breakout with the Ichimoku baseline as a stop is sustained, the main part of the uptrend is yet to begin.
- Yesterday, the yields remained almost the same at closing despite two consecutive higher highs.
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