Daily Brief Macro: Euro Watch: A Conflict of Interest Emerging Between ECB and Italy and more

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?

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.

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.

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.

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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