Big days in Italy coming
Expect a heavy dose of headlines from Italy in the days ahead. The market is on edge with a budget plan due to parliament on Sept 27 or earlier.
Today there were signs of a larger deficit and that sent 10-year yields a whopping 12 basis points higher to 2.94%. That virtually wiped out last week's drop and it also contributed to the failure of the euro to hold Draghi-inspired gains.
Today, Di Maio promised the budget would include some form of basic income. That's a head-scratcher because they're is just no room.
Here's the number to watch: 2%.
There are a million moving parts in the deficit story but how the bond market, and by extension the FX market, reacts will likely depend on how large the deficit is compared to GDP. If it's below 2%, the market will cheer. If it's above, and especially above 3%, then the market will wilt and the ratings agencies may downgrade Italy.
