In the United States , 2014 has opened with a string of negative surprises. Despite uncertainty over weakness observed in recent weeks, the growth and labour market trends should be intact….
Sign up for our free newsletter to receive weekly news from BONDWorld
Click here to register for your free copy
For professional investors and advisers only
In Italy, the Renzi government passed the confidence vote in Parliament with no hitches: economic policy priorities confirmed, but the reform path will not be unhindered.
– In the United States, the string of negative surprises yielded by monthly data in January–February could raise doubts on the growth trend and on the improvement of the labour market. The widely accepted explanation is that most of the slowdown outlined by data was due to severe weather conditions: temperatures in January and February dropped to levels significantly lower than the average for the season in almost all the regions of the country, with heavy precipitations. In her testimony before the Senate Banking Committee on 27 February, Yellen said that there is uncertainty over the origin of the negative surprises recorded since the start of the year. As for the time being, it is impossible to say to what extent weak data were effectively due to bad weather, Yellen stressed that “asset purchases are not on a preset course, so if there’s a significant change in the outlook, we would be open to reconsidering” the pace at which purchases are reduced. How negative are data in actual fact? In January, the manufacturing ISM, industrial production, housing starts, builders’ confidence, and existing home sales, all plunged; retail sales contracted by -0.4% m/m, after an already weak reading in December; employment grew by only 113k. On the other hand, there were also positive signals from less volatile variables, well aligned with the solid trends recorded in 4Q: the survey of small firms saw the index rise back to 2013 summer levels, with hiring plans and sales prices making progress; households’ confidence remains solid, with the current situation index on the rise (a good indication for consumption), and optimistic views on the labour market; new home sales rebounded to the same levels as in July 2008; the FDIC recorded an increase in demand for loans from builders to develop new areas. The round of February data, concentrated next week, will probably not be enough to provide clear proof of the transitory nature of the slowdown in 1Q 2014, but should start to signal an improvement.
We do not believe the FOMC will have to significantly adjust its economic forecasts and the asset purchase tapering path at its next meeting on 18 March.
– The Renzi government passed the confidence vote in Parliament with no hitches. The outcome of the vote confirmed that the majority is the same that supported the Letta government, and that the unease shown by several prominent members of the Premier’s party (the PD) has not transcended party discipline. However, the vote also confirmed that the government’s majority at the Senate is very small, and the bargaining (blackmailing?) power of pressure groups could be strong. Renzi’s inaugural speech before the House generated widespread perplexity due to the lack of details on the government’s priority agenda, and on the strategy that will be pursued to find the financial backing for the measures listed – in much the same was as Enrico Letta’s inaugural speech had, at the debut of the previous government. However, as has emerged from the first statements made by ministers and from press reports, the government’s initial efforts should be addressed to two priority measures: the labour market reform, and a fiscal reform, aimed at reducing the tax burden weighing on wage income. The latter measure will apparently be worth around 10 billion euros, and a choice will have to be made on whether to focus on supporting competitiveness (which suggests concentrating cuts on taxes paid by enterprises), or disposable income (which would call for a reduction of the income tax paid by employees). The intention to make the most of the spending review also seems to be confirmed. In any case, the reform path will not be unhindered. Firstly, all the proposals made will very soon be faced with the problem of financial backing, necessary not only to assure that reforms can be implemented, but also to cover the wealth of spending items that are ignored by the budget under current law, but which then come back to the fore with a vengeance as “non-deferrable”, requiring the approval of ad hoc extension laws.
Savings on interest spending guaranteed by favourable market conditions will only offer partial backing. Secondly, the proposed labour market reform, which apparently could be defined by mid-March, may also meet with opposition among the unions. Renzi’s dealmaking skills will soon be put to test.
Appendix
Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department
Newsletter
