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What Will Italy’s Referendum on Sunday Bring?

Last update on: Oct 24 2019

The attention of many investors and economists is shifting from the change of administrations in the United States to Sunday’s referendum in Italy. The result could have repercussions for the European Union exceeding those from last June’s Brexit vote, according to much of the pre-referendum hype.

On Sunday, Italians will vote whether or not to approve constitutional changes proposed by Prime Minister Matteo Renzi. One aspect of the proposals is to change the upper house of the two-house legislature, the Senate, from 315 directly elected senators to a body composed of 100 local officials. Also, the Senate would be stripped of some of its power, such as holding confidence votes in the government.

Another aspect of the proposals is to eliminate overlapping powers between the central and regional governments that are said to have made the country’s bureaucracy worse. Some opponents say they will vote against the changes because they don’t go far enough.

The prime minister has said he will resign if the referendum isn’t approved. Many analysts say a defeat would be another sign of the growth of populist and antiestablishment views in the developed world. It could lead to a government led by the populist Five Star Movement, headed by comedian Beppe Grillo. Some believe it would lead to a rapid dismantling of the European Union, the end of the euro and more. There are elections in several key European countries in 2017, and a defeat of the referendum in Italy could be a sign of populist party victories across Europe in 2017.

At the same time, Italy has as many as eight banks that are financially weak and in need of capital. The stocks of the banks on average declined about 50% this year. Prime Minister Renzi favors a private-sector solution that includes investors putting additional capital into the banks. But analysts fear that a “no” vote followed by Renzi’s resignation could cause enough market turmoil and uncertainty that the banks won’t be able to raise capital and will fail. Failure of some or all of the banks could cause significant market and economic problems in Italy and Europe. You can read more about the interplay of the banks and the referendum here.

Predictions can be fun, but we’ve seen that they aren’t a good basis for investment decisions. We’ve also seen that the initial market reactions to these headline-making events often are reversed within days or even hours. The way to prepare for these events is to have diversified, balanced portfolios of investments that have margins of safety.

The Data

Most of the economic data since our last summary has been very positive.

Let’s start with manufacturing, which had a lot of data issued. The Kansas City Fed Manufacturing Index had its third positive month after about two years of depressing numbers. The Index was only 1 (following a 6 last month), but some components were very positive, such as new orders and production. The Richmond Fed Manufacturing Index increased to 4 after registering a negative 4 last month. Again, new orders had a strong increase, and manufacturers indicated they were optimistic about the future.

The Dallas Fed Manufacturing Index, which also has been depressed since 2014, had a strong headline number of 8.8. But unlike the other recent surveys, it showed a decline in new orders. Most other components of the index were positive.

Durable Goods Orders increased a sharp 4.8%, but after subtracting the volatile transportation sector the increase was 1%. That’s still healthy, and last month’s number was revised higher. Even better, core capital goods rose 0.4%. That figure represents business investment, which has lagged the last few years. It still is down 4.3% over 12 months.

The mid-month flash of the PMI Manufacturing Index rose a little to 53.9, indicating continued moderate growth in the sector nationwide. The month-end PMI Manufacturing Index rose a little more to 54.1. Also, the ISM Manufacturing Index increased a solid 1.3 points to 53.2.

Overall, we had more positive data from manufacturing than in some time, and this is before any policy changes from the incoming administration.

The rest of the economy also is doing well. The PMI Services Index mid-month flash report dropped a tenth of a point to 54.7. Last month’s reading was the highest in 12 months, so the services sector is doing well.

Leading Economic Indicators increased 0.1%, as expected.

Consumer readings improved. It’s worth noting that these surveys were taken after the election. Consumer Confidence, as measured by The Conference Board, increased sharply to 107.1 from 100.8. That’s the best reading since July 2007.  Consumer Sentiment, as measured by the University of Michigan, increased, though not as much, to 93.8 from 91.6.

One reason for the rise in sentiment might be the 0.6% monthly increase in Personal Income from the Personal Income and Outlays report. Consumers saved some of that income, because spending increased only 0.3%. Prices are inching higher under the Fed’s preferred measure, the PCE Price Index. The core measure increased only 0.1% for the month and is up 1.7% for 12 months.

The housing reports indicate that modest growth continues. Existing home sales increased 2%, after last month’s number was revised higher. This was the highest monthly sales figure since February 2007. New home sales, however, declined, and last month’s number was revised down. Even so, for the year, new home sales are up 17.9%. Pending home sales rose only 0.1%, which indicates existing home sales will close the year flat.

House prices increased 0.6% for the month and 6.1% over 12 months, according to the FHFA House Price Index. The S&P Case-Shiller Housing Price Index, which lags by a couple of months, showed a 0.4% monthly increase and 5.1% over 12 months. This is the best reading since March.

Labor market data is mixed heading into Friday’s Employment Situation reports. The ADP Employment Report showed a sharp gain in new private sector jobs of 216,000, up from 119,000 last month. New unemployment claims rose by 18,000 to 251,000 last week and another 17,000 this week. The four-week average, however, still is at 251,500, which is near October’s average and still near historic lows.

The second estimate of third-quarter gross domestic product (GDP) was increased to 3.2%. A big factor in the upgrade was a higher estimate of personal consumption. This is a backward-looking indicator but shows the economy was doing well in the third quarter.

The Markets

The post-election rally is taking a break. The S&P 500 is down 0.14% for the week ended with Wednesday’s close. The Dow Jones Industrials rose 0.42%. Small company stocks declined 1.51%. The All-Country World Index was flat. Emerging market equities rallied for a 1.20% gain.

Long-term treasuries completed one of their worst months ever with a 0.33% loss for the week. Investment-grade bonds gained 0.22%. Treasury Inflation-Protected Securities (TIPS) gained 0.13%. High-yield bonds gained 0.04%.

The dollar took a break from its rally, losing 0.15%.

Energy-based commodities gained 1.43%, helped by a 4.5% gain on Wednesday after news of an OPEC agreement on production limits. Broader-based commodities gained 0.51%. Gold tumbled 1.22%, giving it a 8.36% loss for the month.

Bob’s News & Updates

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Send a check for $20 per book to Retirement Watch, LLC, P.O. Box 222070, Chantilly, VA 20153. We pay the shipping. Be sure to include your return address.

Or you can order directly from Amazon.

The folks at Marquis Who’s Who recently honored me with a plaque designating me as an Expert Resource in finance and including me in their list of Marquis’ Industry Experts.

I’ll be making some speaking appearances in 2017. The first will be at the MoneyShow Orlando, Feb. 8-11, at the Omni Orlando Resort at ChampionsGate. I’ll have more details in the future of how to register for free. For now, save the date to join us.

Some Reading for You

This article argues that home price increases are overstated in most of the widely read data.

The limits of Medicare coverage are discussed in this article. It covers out-of-pocket spending for cancer treatments.

Inflation is so bad in Venezuela that they weigh currency instead of counting it when purchases are made.

I comment and link to these and other items on my public blog at




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