Morning Commentary: Déjà Vu All Over Again

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Déjà Vu All Over Again Share this story: Andrew Kositkun Foreign Exchange Head Trader

We’re just a few days into the new year, but Italy, yet again, finds itself on the brink of another political crisis. This latest bout of political drama is due to tensions between Prime Minister Giuseppe Conte and former Prime Minister Matteo Renzi, leader of the junior coalition party Italia Viva (IV), over how to spend the 209 billion euros in Next Generation EU funds available to Italy.  To be sure, IV has a relatively smaller weight within the ruling coalition, but the withdrawal of IV’s 18 senators would bring the government short of the 161 required majority and throw the government in crisis. So what happens now?  For starters, a full-fledged government crisis, or early elections, are not very likely at this point. Recent polling numbers for members of the current coalition government are bad. Therefore, there is incentive for the current governing parties to maintain the status quo. Not only would elections risk lowering the number of seats members of the current government have under a new constitutional framework, but they may also lose control of management of Next Generation EU funds and of the election of the next president of the republic in 2022. Furthermore, the window for early elections is also slowly closing, as new elections cannot be called during the “white semester,” or the last six months of the current president of the republic’s term that begins in August. As a result, the path of least resistance to solving the current conflict is to involve some combination of 1) concessions to IV’s demands on how Next Generation EU funds are to be used and 2) a limited cabinet reshuffle that gives IV a more prominent role and say in the management of Next Generation EU resources.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Nonfarm payrolls came in worse than expected, as December payrolls fell 140,000 jobs versus consensus for a 50,000 gain. This was the first jobs decline since April. The previous number was revised up from 245,000 to 336,000. The unemployment rate stayed at 6.7%, beating consensus for a rise to 6.8%, and average hourly earnings beat expectations, rising 0.8% versus expectations for a 0.2% increase. In essence the broad story with the virus spreading and depressing the labor markets is playing out as the job declines were primarily concentrated in the services sector.  The House will move to impeach President Trump if Cabinet members do not invoke the 25th Amendment and remove him from office. Per Assistant House Speaker Katherine Clark and Representative Jim Clyburn, the process could start within a week. President Trump has conceded the election, adding he was “outraged by the violence, lawlessness and mayhem” and promising a smooth transition in a video message released last night. It has also been reported that President Trump’s list of potential pardons includes White House officials, family members and himself. It still remains unclear if the president has the power to pardon himself under the Constitution.  Cleveland Fed chief Loretta Mester doesn’t see ramped-up fiscal stimulus triggering a pullback in policy this year. Conversely, FOMC colleagues Charles Evans and Raphael Bostic have stated they could support tapering before year-end. As for Wall Street, multiple banks have revised their U.S. 10-year yield outlooks higher, with the U.S. yield curve continuing to strengthen.  The U.S. suspended retaliatory tariffs on French imports that were in response to a digital tax on U.S. tech companies.  Canada’s jobs report missed expectations, as the Canadian economy lost 62,600 jobs versus consensus for a 37,500 decline. While there was a net job loss, full-time jobs actually increased by 36,500 jobs, while part-time jobs contracted by 99,000 jobs. The unemployment rate ticked up to 8.6% from 8.5% last month but beat expectations for an increase to 8.7%.  On the vaccine/virus front, the U.K. has approved Moderna’s vaccine, and Pfizer announced that studies show its vaccine is effective against new COVID-19 variants.

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