MIDEAST: “IRAN-BACKED HOUTHIS REACHED YEMENI PORT CITY OF DHUBAB, ALONG [...]

• MNI: ITALY JUL FINAL HICP 2.9% Y/Y (2.9% FLASH, 3.0% JUN)
• ITALY JUL FINAL HICP -1.0% M/M (-1.0% FLASH, 0.0% JUN)

AP, NYT and NBC have each called the Wisconsin Democratic gubernatorial primary for Milwaukee County executive David Crowley in a boon for the party's centrist establishment and a blow to the recent momentum for Democratic Socialists of America (DSA) candidates in primary elections. Left-wing State Rep. Francesca Hong had been viewed as a strong favourite for the nomination, with polls in August and July showing her holding double-digit leads over Crowley. 

• Crowley had the backing of retiring Gov. Tony Evers (D), with a number of senior figures on the left of the Democratic Party seemingly offering Hong less fulsome support than other DSA candidates amid a string of gaffes.
• The win for Crowley, viewed as a less divisive figure in a key swing state, has been seen to bolster the Democrats' chances of retaining the governor's mansion. Polymarket now shows the Democrats with a 75% implied probability of winning in November, up from a recent low of 40% on 11 Aug when there was a wide assumption Hong would be the nominee. Crowley will face off against Trump-endorsed US House Rep. Tom Tiffany (R-WI) in November.
• The left of the Democratic party did not end up winless, though. In Minnesota, Lt. Gov. Peggy Flanagan comfortably won the nomination to run for retiring US Sen. Tina Smith's seat. Nevertheless, Hong's loss will deal a blow to the left of the Democratic party as it seeks to show it can win in purple as well as strong blue states. 

OATs have underperformed EGB peers in recent weeks, with political/fiscal risks associated with the 2027 budget and presidential elections beginning to come into view. The 10-year OAT/Bund spread was skewed ~11bp wider by a Bloomberg benchmark roll in June, but has since widened ~4bps further to 81.5bps at present. 

• Meanwhile, the 10-year BTP/OAT spread is back in negative territory, now at -3bps after trading between +2/3bps in late July. The BTP/OAT spread struggled to consolidate below the 0bp level through the ongoing bouts of uncertainty associated with last year’s budget negotiations.
• On an outright basis, 10-year OAT yields are just below 4%, the highest since 2009. The 10-year swap spread of -79bps is also comfortably below the ~60bp implied by a simple cross-sectional regression based on ratings and current fiscal metrics (see chart).
• Officials have already noted that the 5.0% deficit goal for 2026 is unlikely to be attained, owing to the impact of the Iran war on economic activity. In an interview with the FT earlier this week, budget minister Amiel said that the Government would press ahead with spending cuts in the 2027 budget despite proximity to the Presidential election: “We prefer to cut spending, and if our successor wants to, they can cancel the measures”.
• Our latest European futures positioning monitor noted that OAT structural positioning has shifted decisively in the last month, moving to short after having been in long territory since early May. See here