The three things you need to know this week: U.S. budget deficit projections raised, the Italian Prime Minister resigns and leading indicators continue to show manufacturing.
CBO Raises Deficit Projection: The Congressional Budget Office updated its 2019 budget and economic projections, forecasting the federal budget deficit will be $960 billion in 2019 and averaging $1.2 trillion between 2020 and 2029. The current 2019 deficit is $63 billion more than the previous forecast in May. Recently enacted legislation accounts for the bulk of the increase, mainly due to the higher discretionary funding limits for 2020 and 2021. Deficits are expected to range between 4.4-4.8% of GDP over the next decade. This will likely result in the debt/GDP ratio rising from 79% in 2019 to 95% in 2029 - the highest level since just after World War II.
Volcker Rule Changes: The final rule changes seek to provide lenders a much clearer picture of which trades are prohibited and puts the burden on regulators to determine compliance. While prop trading is still banned, market-making activities are likely to increase as banks can set their own risk limits based on internal models. The rule change should give banks’ more flexibility on investments and reduce compliance costs.
Italian PM Resigns: Italian Prime Minister Giuseppe Conte resigned in response to the League’s no-confidence motion. Interior Minister and League leader Matteo Salvini withdrew his support for the government, causing its collapse. President Sergio Matterella will give Five Star and the Democratic Party time to form a new coalition government, which would push the League into opposition. Italy's bond yields seemed to shrug off the political turmoil, tumbling on expectations that any political crisis would be short-lived as a new, more market-friendly coalition government could be formed in the near future which would remove the uncertainty of snap elections.