ECB preview: 51% /49%
Our base-case call for the ECB’s rate decision is a rate hike of 25bp (with a probability of 51%) since we expect the ECB may not only weigh the developments of the input set (inflation, cycle, financial conditions) not changed dramatically since the last meeting, but also the implications in terms of the consistency/credibility of the forward guidance.
Curves reaction and our strategic/tactical approach
The recent data (weaker growth and softening labour market) have increased the dovish sensitivity of the curves, so it is reasonable to expect that the monetary and short parts of the govt. and swap curves may react in a neutral-to-dovish fashion to the rate decision. However, we see the m-l parts of the swap and govt curves responsive to the CB’s rates, with long tenors also responding to the global liquidity reshaping context. Thus, we like: i) the ESTR future contracts from March 24 to Dec 24; ii) in EUR swap/swaption, receivers in the 5Y to 10Y area; iii) bear steepening in the swap curves (10/20Y and particularly the 5/10Y).
Peripheral ratings and RV
- Portugal: On 8 September S&P raised its Outlook on Portugal (to Positive from Stable) and kept the rating unaltered at BBB+.
- Spain: on Friday S&P is scheduled to update its credit assessment; we do not expect any change to either the rating (A) or the Outlook (Stable). The rating outlook for Spain is arguably constructive and the odds are more tilted towards an improvement.
- Italy: it was the clear loser of last week (spread vs. Germany up by c.4bp), with speculation about the possibility the government is going to revise up its fiscal deficit for 2023 (not a major game changer, but it could act as a wake-up call for investors). To support the funding activity and to partially offset market volatility, Tesoro announced a new Btp Valore for October.
Tactical approach on peripherals.
- Consistent with the view of higher yields for longer (than the market is expecting), we like Italian CCTs-eu 2024-2025. You can find our last switch trade idea published last week here.
- Regarding Italy, due to the supply activity in the next few weeks , we like flattening positioning in the 5Y-7Y sector.
- As a very tactical trading approach to the next round of rating agency decisions (on Friday, S&P on Spain and Fitch on Germany), we like positions that favour a SPGB-BUND spread compression.
Weekly supply
On the bills market total issuance will be c.EUR21.0bn in gross terms and c.EUR10.4bn in net terms (redemptions in Italy and Belgium). In bonds, core markets will see the Netherlands, Germany and EU active. Among peripherals, Italy and Portugal will tap the market on Wednesday. Total gross issuance will be c.EUR20.3bn, but a negative net issuance at -EUR13.4bn.