2018 Italian Elections
The Italian election must be held no later than May 20th. Therefore, it will be held in March, April, or May. It has been surprising to see the Euroskeptic movement gain so much momentum considering the relative strength of the overall economy. If the economy was weak and Sicily saw even more weakness, the election would be a rout in favor of the Euroskeptics. Italy appears to be going down the route of leaving the E.U. I’m not saying it will happen next year, but the process can begin next year.
The chart below is a great measurement tool to show how likely an Italeave is. As you can see, it shows the percentage of each parties’ voters which support the Euroskeptic movement. As you can see, the 5 Star Movement, and the Northern League are the most likely to want Italy to leave the E.U. This is important because the 5 Star Movement is leading in the polls. The Democratic party has been crashing in the polls, while the 5 Star Movement has been stable. The Forza Italia and the Northern League parties have seen an increase in support this year. Even if the voters switch from the Democratic party to Forza Italia, it’s bad for the odds of Italy staying in the E.U.
In a recent poll, the 5 Star Movement was at 28%, the Democrats were at 24%, Forza Italia was at 17%, and the Lega Norda was at 14%. If you were to extrapolate those results and the poll below, there is about 34% support for Italy leaving the E.U. Support for Italy staying in the E.U. is about 45%. That’s not including the undecided vote which supports remaining in the E.U. If the 5 Star Movement and the Northern League formed a coalition government, it wouldn’t necessarily mean the Italeave would happen right away, but it could happen eventually. The momentum against the Democrats, who are led by Matteo Renzi, should be worrisome. One last point worth considering is that young people favor an Italeave. 51% of those under 45 want an Italeave, while only 26% of those 45 and older want an Italeave.
Fed Rate Hikes To Worry The Market?
The Fed has raised rates 5 times this cycle and isn’t showing signs of stopping. The chart below shows the past few times the Fed has raised rates 5 times. To be fair, the Fed has raised rates 25 basis points each time while other rate hikes have been larger in previous cycles. That being said, the market is more sensitive to rate hikes now because inflation is low and economic growth has been sluggish for most of this expansion. While those caveats are important, it’s not like you would be making decisions based on this information alone. It is simply food for thought. As you can see, the stock market is down 4 times and up 3 times in the next 6 months and 12 months after the 5th rate hike. The indicator I follow closer is the relationship between inflation and the Fed funds rate as well as the yield curve. The latest difference between the 10 year bond yield and the 2 year bond yield is 60 basis points as there has been a modest steepening in the past few trading days.
3.98% GDP Growth In Q4?
The economy has near term momentum. The GDP growth in Q4 2017 looks like it will be strong as the Atlanta Fed GDP Now tracker expects growth to be 3.3% as of December 19th. This was unchanged from the previous estimate on December 14th. First the estimate fell to 3.1% because of the industrial production report and the capacity to utilization report from the Fed. However, it increased back to 3.3% because of the new residential construction report. The St. Louis Fed GDP forecast, which was updated last Friday, shows 2.96% growth. The NY Fed forecast is the most bullish as it expects 3.98% growth. It’s interesting to see the industrial production and capacity to utilization reports being modest negatives lately because in November, they pushed the NY GDP Now higher by a combined 0.41%. The other major report which boosted its Q4 estimate was the September ISM manufacturing report. That’s interesting because September isn’t a part of Q4. It must’ve improved the forecast for future months. The estimate for Q1 2018 is 3.15%. There haven’t been many changes since it came out on December 8th which is reasonable because we don’t have a lot of the economics reports on December, let alone January. The most critical one will, of course, be the holiday retail sales.
GDP Boost From Tax Cut
As we’ve discussed, it’s important to objectively look at the positive effects of the tax cut. The chart below shows the potential positive effect the tax cut will have on GDP growth. As I’ve discussed previously, the estimates were too low for the Bush tax cuts, so I wouldn’t be surprised if they beat expectations. It’s possible 2018 growth is even faster than 2017 growth as it won’t be dragged down by the weak Q1, 2017 was weakened by. There are some economists who claim the first quarter is habitually marred by weak results. That is far from a trend. That’s not rigorous analysis. It’s simply saying it seams like Q1 is always weak, just like it seems like the Yankees always win the World Series (they don’t).
Conclusion
The Euroskeptics gaining control of Italy after the parliament election in the spring of 2018 is one of the risks I will be focusing on in the next few months. It has the potential to unravel the markets like the Grexit did a few years ago. This will be different because there isn’t a direct fiscal bailout going to Italy like there was going to Greece. Secondly, the current economy is relatively strong, while there was mid cycle weakness, especially in Europe, when the Grexit controversy took place. Remember, the ECB will have less firepower to quell the fears about Italeave in 2018.
Recent Comments