Global Daily – Is there a way out of the political deadlock in Italy?

by: Aline Schuiling , Bill Diviney

Euro Politics: PD split could be key to government formation – More than a week after the Italian elections, statements by political leaders suggest that a situation of deadlock is ensuing. Statements to the press by the leaders of the two main winners of the elections the Five Star Movement (M5S, which became the biggest single party) and the Lega Nord (LN, which became the biggest party within the centre-right coalition) suggest that the M5S would favour to be in a government with the centre-left Democratic Party (PD). Also reports to the press suggest, that there is also support within the ranks of the PD to teaming up with M5S. A combination of the two populists parties M5S and LN (which we would consider to be the most negative outcome for financial markets) seems to be unlikely at this stage. LN leader Matteo Salvini has said that his preferred government would be a centre-right minority government, while he has excluded working together with the PD. Nevertheless, reports in the press mention that parts of the LN would be willing to be in government with the PD, while in reverse part of the PD lawmakers are supportive of a government with the centre-right coalition (including LN). Meanwhile, Matteo Renzi resigned as the leader of the centre-left Democratic Party (PD) and his successor Maurizio Martina has fiercely stated that his party will not enter a coalition government but will join the opposition. We think that there is a significant possibility of a PD split, which could see parts of the party support a new coalition government.

Looking at all the options and comments that were made until now, we think that the largest probability is currently for a centre-left combination of M5S and (parts of) the PD and other smaller centre-left parties, or a broad coalition of right and left, which would amount to a technocrat government with a very narrow policy agenda and perhaps for a short time period. On 23 March, the new parliament will start and presidents of both houses will be elected. Subsequently, president Mattarella will give parties the initiative to try and form coalitions. (Aline Schuiling)

US Macro: Strength in core goods inflation unlikely to alarm the Fed – February core CPI inflation was in line with expectations at 0.2% mom, or 1.8% yoy. The drivers were very similar to the January print, with further strength in apparel and car insurance offset by weaker services inflation. While the continued strength in apparel came as surprise, the fact that import price growth in this category remains contained despite dollar weakness suggests it is more likely to be an unwind of the weakness we saw in late 2017 than a new uptrend. Motor vehicle insurance also rose strongly again, likely on the back of the considerable hurricane damage to cars late last year. However, shelter inflation, which makes up 42% of the core CPI basket, continued the cooling trend it has been on over the past year, dropping to 3.1% yoy – the lowest since August 2015. Medical and other services categories also weakened, suggesting the impact of the tight labour market on inflation remains remarkably muted. All told, the Fed is likely to draw comfort from the fact that inflation is moving back towards its target, but the continued subdued trend in services inflation – combined with the ‘goldilocks’ payrolls report we got last Friday – suggests we remain some distance from an overheating scenario. (Bill Diviney)