The European Commission has classified as insufficient the measures adopted by Spain and Portugal to cut their excessive deficits, leaving it to the Council to decide whether or not to proceed with sanctions……..
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
Intesa Sanpaolo – Research Department For professional investors and advisers only
There is still a margin for reasonable solutions. The June employment report gives positive news for the US recovery, with a strong nonfarm payrolls bounce. The weakness in May was likely transitory. But domestic data are no longer sufficient to move the Fed from its current pause mode. Wait and see is the name of the game.
-The European Commission announced its decision on the failure of Spain and Portugal to correct their excessive deficits, increasing the chances of sanctions being imposed (initially consisting of a non-interest bearing deposit amounting to up to 0.2% of GDP, but which could evolve into a fine and a suspension of structural funds). The Commission had little margin to act differently, in light of existing budgetary rules. Given the two countries’ electoral cycles, Spain and Portugal have not achieved the planned correction required to cut the deficit/GDP ratio back below the 3% threshold. Spain’s position in particular seems indefensible: despite achieving one of the highest growth rates in the euro area, the country only managed to cut its deficit in 2015 to 5.1%, and the cumulated “fiscal effort” over the past three years has been essentially zero. Portugal’s situation is certainly more reasonable, considering the still modest pace of the economic recovery: the country’s correction effort in 2013 and 2014 was significant, and the deficit unadjusted for the cycle and one-off items decreased in any case in 2015, albeit with an easing of the structural stance. At this point, the Council must decide how to strike a balance between the respect of existing budgetary rules, and allowing sensible political and economic policy conduct. It would be absurd to demand from Portugal a fiscal correction effort that would be unsustainable in both economic (due to slow growth) and political terms (given the precariousness of the government in office). This would create the conditions for a new crisis in an already delicate environment, in the wake of the UK referendum and ahead of the intense elections calendar in 2016-17. On the other hand, it makes sense to require Spain to resume, at a sustained pace, the process of reducing its deficit, although in this case as well fiscal tightening must not compromise the resilience of the recovery, and the reduction of the deficit to less than 3% will have to be postponed. It should also be said that the global economic scenario is burdened with uncertainties, and that overly restrictive budget policies should be avoided in 2017. The choice is a political one, and should be taken by governments rather than by the “technical” European Commission. By the way, the latter hinted that sanctions may well be symbolic.
-The June Employment Report shows strong employment growth after the May disappointment. Non-farm payrolls increased by 287k in June; the revision for the two previous months is -6k. The breakdown by sector is very encouraging, with a recovery in private services (256k from 35k in May), much stronger than the indications provided by the non-manufacturing ISM; payrolls are up in manufacturing (+14 k), flat in construction and down in mining (-6k). Employment in the households’ survey increased by a modest 67k. The workforce bounced by 414k, after dropping sharply in May, with a resulting increase of the participation rate to 62.7%, from 62.6%. The unemployment rate rose back to 4.9%; the broad unemployment rate dropped to 9.6% (low from 04/2008). Work hours grew by 0.2% m/m and point to moderately higher in industrial production in June. Hourly wages confirmed the modest uptrend, with a +0.1% m/m increase. Overall, the data indicate that the slowdown in May employment growth was likely transitory and confirm that slack is still decreasing. The Employment Report sends a positive signal for the continuation of the expansion of the US economy, and eases some of the uncertainty weighing on the domestic scenario, as highlighted by the FOMC in June. However, renewed financial turbulence and the risk of a slowdown in global growth following the UK referendum are reason enough to keep the FOMC on hold in July. It will then remain to be seen if global conditions will allow a move in September: as Fischer and Dudley warned, it will take time to assess the effects of Brexit. The FOMC is now firmly set in wait-and-see mode.
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.
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).
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.