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Will the today’s Italian bond auction influence the single currency again?

Will the today’s Italian bond auction influence the single currency again?

Italy, will today try and sell 8bn € of 3 and 10 year bonds. On Friday, Italy paid Euro era highs of 6.5% for 6 month maturities, therefore with the increased risk of holding longer term debt and, the fact that banks are trying to scale back their exposure to Eurozone debt, yields could hit new records above 7%.

In the UK the Chancellor is due to speak at 12:30 this afternoon and the Office for Budget Responsibility (OBR) will publish its Economic and Fiscal Outlook after his speech is concluded. We expect the OBR’s forecasts for growth to be revised down sharply for both this year and next, but for the borrowing target for this year to be maintained. We do expect that the structural deficit will now disappear in 2016-17 rather than 2014-15.

The usual leaking ahead of speech suggests that the Chancellor will claim that the fall in gilt yields has yielded savings of £21.5 billion between 2011-12 and 2015-16, some of which will be spent on a variety of measures to boost short-term growth. Some of this is going to be spent on infrastructure spending. Given the need to keep fiscal policy broadly neutral any spending measures will need to be offset by taxation increases and there is a suspicion that the Chancellor could reduce tax relief on pension contributions from marginal rates to a flat 20% in order to save the social security budget some £7 billion. Attempts to stimulate bank lending will take the form of loan guarantees to SMEs which should reduce the need for collateral. However, with regulators continuing to press banks to raise Tier 1 capital ratios and a likely increase in the bank levy to ensure that it raises the £2.5 billion expected by HMT, it remains to be seen whether the Chancellor will have any success.

The weekly Redbook retail sales report will provide the first hard data on the strength of Thanksgiving retail sales. The National Retail Federation’s survey suggests that sales were up by 16.4% year-on-year, but this looks set to be a dramatic overstatement. A strong series of consumer purchases could easily have been financed by a lower spend on services. Thanksgiving marks the start of pre-Christmas consumption and we could easily see early purchases bring consumption forward from December.

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