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ITALY: BUDGET BUSTER
SEP 28 2018
Italy's newest budget defied European Union rules; Argentina and the IMF made yet another deal; the Fed hiked rates while the U.S. economy continued to grow
“I won't quit, for the good of the country…. we would throw the country into chaos."
-Italy’s Finance Minister Giovanni Tria
Among the programs in the budget are a “citizen’s income” for the poor, tax cuts, and a rollback of pension reforms that had raised the retirement age.
Argentina: Strike up the band The International Monetary Fund (IMF) revised its deal with Argentina yet again, this time setting a band of currency values in which the peso would be permitted to “float” before the central bank could intervene.
The amount of aid for the overall deal is now a total of $57 billion, of which $15 billion has already been disbursed and $35 billion is disbursable between now and the end of 2019. The deal was described by IMF head Christine Lagarde as the “biggest ever”, covering almost all of the government’s $40 billion in foreign-denominated debt repayments due by the end of that year. But the funding is also available to be used to finance the budget if needed.
Important details of the new currency regime include that there would be “a floating exchange rate regime without intervention”, but with some allowances for “limited intervention to prevent disorderly market conditions” if there is “extreme overshooting of the exchange rate”. The band for the peso was set at 34 to 44 pesos per U.S. dollar. Outside of that range, the central bank would be able to spend up to $150 million per day from its reserves to support the currency. The theory appears to be that covering Argentina’s foreign debt and budget would eliminate the prospect of a default and forestall, if not remove, the possibility of a severe austerity plan that would further harm people dependent on government programs such as pensions and salaries.
So far, the peso had traded as high as 41.54 per dollar, and closed trading on September 28 at 41.31.
U.S. Economy and the Fed: Upward and onward On Wednesday, the FOMC voted 9-0 to raise its target rate range 25 basis points (bps) to 2.25% - 2.00% (upper and lower bounds). Financial markets reacted calmly, as the hike was widely anticipated; after an intra-day wobble of just under 1%, the S&P 500 ended the day down (0.33%); the 10-year Treasury fell about 5 bps to 3.048%.
Observers saw the removal of the word “accommodative” from the Fed’s monthly Statement as the most newsworthy event. But Fed Chair Jay Powell took pains to say that the change didn’t reflect a shift away from its generally accommodative stance toward the economy. Given market reaction, it seemed that most readers accepted the explanation.
The week’s economic data was roughly in line with the Fed’s assessment. Personal income was up 0.3% in August from July, as was personal spending. Core PCE inflation was flat for the month, keeping the year-on-year figure at the Fed’s preferred 2.0% level. There was, however, a notable pickup in wholesale inventories rising 0.8% for the month – a faster accumulation of wholesale goods than expected. Explanation vary, but one possibility is a slowdown in export shipping due to the effects of the rising tariff regimes put in place earlier in the year.
Originally published:
ITALY: BUDGET BUSTER