- Italian government scraps tax increases and signals less fiscal austerity.
- Japanese data weaker than expected but still suggest a recovery has started.
- Today's euro-zone CPI should improve odds of ECB rate cut.
- Italian PM Letta to deliver his message of less fiscal austerity to Berlin.
The market sentiment is still moderately positive on expectations that major central banks will continue to support the market. The gradual movement towards less fiscal austerity evident in the euro zone has so far been received relatively well in both the stock and the bond markets. In Italy Prime Minister Enrico Letta yesterday presented the new government’s programme in the Italian parliament and it does appear to be a shift towards less fiscal austerity, see Financial Times. A planned increase in the sales tax in July and the June instalment of the unpopular property tax will be scrapped as demanded by Berlusconi’s People of Freedom Party, albeit the final fate of the property tax is not yet clear. In addition there were promises of some increases in welfare spending. The scrapped tax rises alone are expected to cut tax revenues by EUR6bn. Letta did not specify alternative funding for these measures and did not indicate to what degree the government’s target for the budget deficit has been changed.
In Japan the data released overnight were weaker than expected but still suggest that the Japanese economy has started to recover. Industrial production in March seasonally adjusted increased 0.2% m/m (Cons: 0.4% m/m). This was the fourth month in a row with an increase in industrial production. Japan’s JMMA/Markit manufacturing PMI in April also improved to 51.1 from 50.4 in March and in April reached its highest level since March 2012. The unemployment rate in March dropped to 4.1% from 4.3% and hence reached its lowest level since November 2008.
The U.S. stock market finished higher with S&P 500 closing up 0.8% and the Asian stock markets are also higher across the board despite data released in Asia this morning disappointing slightly. Nikkei and Hang Seng are up 0.1% and 0.8% this morning. Mainland China is closed for a public holiday today.
In the U.S. bond market 10-year U.S. bond yields have increased by 2bp to 1.67% since market close on the back of the improved risk sentiment. In the European bond market yesterday’s Italian auctions of five-year and 10-year were very successful despite signs of less fiscal austerity in Italy. 10-year Italian government bond yields declined by 9bp to 3.91%.
In the FX market the major crosses have been largely range trading since market close in Europe. EUR/USD is trading largely unchanged at 1.310 and USD/JPY has moved marginally lower to 97.94.
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