The global challenges remain out there, but the macro impact has been so far (surprisingly?) moderate, and even less severe in terms of markets’ performance. Some factors are “soothing the pain”: 1. Fiscal stance is openly expansionary; ii) 2. Central banks’ readiness to step in, and; iii) 3. Financial conditions are still sufficiently resilient.
Eurozone: still waiting for (less severe?) headwinds to materialise. The “starting point” in terms of momentum is not too bad. The (definitely expansionary in some cases) fiscal stance provides a non-negligible offsetting factor. The actual flow (volume, quality and cost) of credit (mostly bank lending) to the real economy is improving. I any case, the toll (growth) will finally be paid. How heavy could it be? All in all, from a medium-term perspective (two years), the discounted impact looks mild. What is the risk of disappointment?
Inflation is finally vanquished, but by how much and for how long? Inflation dynamics will “allow” the ECB to provide further accommodation if (global) circumstances warrant but will arguably not be a compelling factor for extra accommodation.
CB’s outlook: For the ECB, our base-case scenario contemplates that at a 2.0% DFR, the rate-cut cycle is largely over. An additional cut may remain for (late) 2H25, which would arguably be warranted not by the macro but by factors that eventually tighten financial conditions (market dynamics, excessive/sharp risk-off related EUR strengthening). Fed: we expect 50bp of rate cuts in FY25 (the first 25bp cut most likely after September). We struggle to share the same dovishness for 2026 that the curve now discounts.
Full roll-off of PEPP and APP + a new push for funding needs: a supportive combination for yields. in the event of no sharp disruption, yields should still find room to the upside.
Peripherals 2H25 issuance dynamics. Spain is the better positioned among the big-5 EU issuers while Italy appears to be slightly behind.
Value in the peripheral curves – credit risk pricing. Generally speaking credit risk pricing appears tight – i) the cheapening of German assets makes the valuation of other EGBs comparatively richer. ii) in this context, we still like spread compression positioning vs. steepening of the German curve.
Peripheral curves RV ideas: i) Steepening in the Italian 1Y-7Y credit curve; ii) Flattening in the Portuguese 10Y-30Y credit curve, and; iii) Box IT-SP 15Y-30Y.
BTP linker opportunity: the market is likely to start pricing in the fact that the net supply of BTP linkers is set to shrink in 2026, which should provide a supportive backdrop for the asset class.