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In Europe, the focus remains on the ongoing Italian budget fight, while markets will also keep an eye on the euro area October HICP figures after recent months’ core inflation misses, point out analysts at Danske Bank.  

Key Quotes:  

“On Tuesday, we will get euro area preliminary Q3 GDP numbers. Quarterly growth rates slowed down to 0.4% q/q in H1 18 and we expect to see a similar pace of expansion in Q3 18. We will not yet get a component breakdown, but we expect growth in Q3 to have been mainly driven by domestic demand. On Wednesday, both HICP and core inflation numbers are due. Since April, headline inflation has been close to the ECB’s target (below but close to 2%). We expect the October numbers to increase slightly to 2.2% y/y driven by higher energy prices and much more importantly, higher core inflation. We expect a pickup in core inflation to from 0.91% to 1.09% on the back of higher service price inflation, as the negative drag from a reduction in Italian university fees and German transport insurance premiums fall out. That said, the core inflation print will remain within the range it has been over past years.”

“The Italian budget fight is still drawing headlines, especially after the European Commission (EC) formally voiced a negative opinion on Italy’s 2019 draft budgetary plan and asked Italy to revise and resubmit its plans within the next three weeks. We have a hard time seeing the Italian government giving in too easily, as public backing of the budget plans remains high and we therefore expect three weeks of fierce negotiations. One important number to look out for is the 10Y Italian-German government bond spread, which currently is at 315bp. Should this increase to 400bp, the government has previously signalled some willingness to adjust the budget.”