Fathom’s monthly Economic Sentiment Indicators (ESIs) are designed to measure underlying economic sentiment. They use a technique known as principal component analysis to distil the information from numerous consumer and business surveys into a single composite indicator. The ESIs have been trained on quarterly GDP growth in their respective countries, and by construction have the same mean and variance as those series. They provide monthly updated estimates of underlying sentiment that display less short-term volatility than quarterly GDP growth. Our US ESI has troughed, supporting evidence from the Fathom Leading Indicator (FLI) that the world’s largest economy will avoid recession

Following last year’s general election — which resulted in a hung parliament and a populist coalition (see ‘Italy – the relative calm after the storm’) — Italian debt sold off with yields peaking at 3.6% after the new government drew sharp criticism from the European Commission for its proposed budget that risked breaching EU rules. In recent weeks the Commission has softened its stance on Italy and reached a compromise with the government. This, together with hints of a more dovish stance at the ECB, have pushed Italian yields lower. Refresh the chart in your browser | Edit chart in Datastream Fathom’s

Fathom’s euro area Economic Sentiment Indicator (ESI) weights together survey measures of household and business confidence to gauge underlying economic sentiment. The aggregate euro area ESI fell 0.1 percentage points to 0.3% in April, its lowest level since December 2014. Sentiment has been trending down since the beginning of 2018 in Germany, France and Italy, driving the weakness in the aggregate euro area ESI, while it has been broadly stable in Spain and Portugal. Refresh the chart in your browser | Edit chart in Datastream The Italian ESI has seen the largest deterioration of the three countries, falling from 1.2% in January

During the heyday of the sovereign debt crisis, speculation over whether Greece would abandon the euro was rife. In the end, Greece defaulted and its economy shrank by one-quarter, but it did not leave the euro. Ever since, there has been concern that Italy’s elevated debt burden might lead to its own debt crisis, and a possible ‘Italexit’. Refresh the chart in your browser | Edit chart in Datastream Fathom’s proprietary indicators suggest that investors continue to see a high risk of default in Greece and a significant risk of both default, and euro exit, in Italy. However, drawing close comparisons between

Although they continue to be volatile, Italian spreads have dipped below 300 basis points in recent days amid speculation that the country’s government may be willing to cut a budget deal with the EU. Indeed, according to Fathom’s proprietary indicator, the market-implied probability of a default by the Mediterranean sovereign edged down to 14.8% in November.[1] Refresh the chart in your browser | Edit chart in Datastream Refresh the chart in your browser | Edit chart in Datastream As Fathom noted to clients last week, the market’s initial reaction to the coalition’s fiscal plans had perhaps caused Italian bonds to

At the time of writing, the Italian government budget deficit target is 2.4% in 2019, 2.1% in 2020 and 1.8% in 2021. This misses the ECB target of 1.6% each consecutive year. Politicians are hoping to stimulate the country’s lacklustre economy and fulfil pre-election pledges including: the introduction of a guaranteed basic income; the adoption of a flat rate of income tax and the repeal of the previous government’s pension reforms. For the Five Star Movement, the agreement to enlarge the budget deficit and implement their flagship policies is an important step forward, as polls suggest that the party has

Fathom’s proprietary ‘probability of default’ indicators use market pricing to infer the perceived likelihood of sovereign defaults occurring within various time periods. The volatility in these indicators has declined substantially since the heights of the euro area crisis. Nevertheless, recent events in Italy have caused a spike in volatility. At 14%, the market-implied probability of default within the next five years remains relatively low. However, the risk is twice as high at the ten-year horizon, with market participants evidently concerned by the country’s elevated public debt burden For now, the sovereign still enjoys access to capital markets with the government

Recent events have reminded us all that a week is indeed a long time in the world of Italian politics. Fears that new elections were imminent sent markets briefly into turmoil, causing the largest one-day increase in Italian yields since the inception of the euro. Although some of this has since unwound heightened volatility is likely to remain. Refresh the chart in your browser | Edit chart in Datastream Equities took a battering, with banking stocks particularly affected. In the case of Italy, Fathom’s Financial Vulnerability Indicator (FVI) has been flashing red for some time — relative to its own historic average,

Hopes for euro zone reform face both green and red lights. The approval of Germany’s new ruling coalition has cleared the way for plans to strengthen the single currency area. Yet proposals to backstop banks and governments remain contentious, while Italy’s new government adds uncertainty. With the European Central Bank’s firepower waning, delay may prove costly. The vote by members of Germany’s Social Democratic Party (SPD) for a renewed coalition with Angela Merkel’s Christian Democrats (CDU) removes one obstacle to reform. With national elections out of the way and europhile leaders installed in both Germany and France – the euro

On Sunday 4 March, Italians voted in a general election to decide the composition of both houses of the national parliament. The vote came against a backdrop of disillusionment with the status quo in Italian politics and the results showed a surge in support for anti-establishment parties such as the Five Star Movement and the Northern League. Despite economic growth firming last year, Italy’s expansion remains slow relative to its European peers and unemployment is still elevated. Furthermore, the fruits of the economic recovery have not been evenly shared, with unemployment in the south remaining well above the national average.

In the aftermath of the Great Recession of 2008–09, there were serious concerns about the fragility of euro area government finances. Fathom uses CDS spreads to calculate the market-implied probability of a euro area sovereign defaulting on its debt. These proprietary indicators were broadly unchanged in February and, with the exception of Greece, remained below 10%. This represents a vast improvement relative to levels seen through 2011 and into 2012 at the height of the euro area crisis, and can be attributed to reductions in government budget deficits. Refresh the chart in your browser | Edit chart in Datastream However, declining budget

With the exception of Germany, Fathom’s Economic Sentiment Indicator (ESI) told a positive story of improving sentiment in the euro area in December. The aggregate indicator for the euro area ticked up slightly to 1.3%, with surveys from most countries confirming that the overall degree of economic sentiment remains elevated across the currency bloc.    Refresh the chart in your browser | Edit chart in Datastream Italy’s ESI continues to outperform hard data and hovered around all-time highs at 1.4% in December. However, should the result of the March elections lead to increased financial market volatility, a reversal in economic sentiment is