In limbo: market participants still look to be in “limbo” regarding where the economic context is heading and what the ensuing actions from central banks will be. In general terms, the macro context continues to indicate resilient growth and uncomfortably sticky inflation.
The correlation between yields and the performance of risky assets continues to be consistent, with range-bound dynamics and with firm support to valuations. The correlation between absolute yield levels and risky assets valuations continues to reflect a self-balancing co-movement
Curves outlook: Barring accidents or big surprises from the central banks, the upper bound of ranges continue to be tested but not really breached. Should the ECB deliver as we expect, we expect more sensitivity in the short part of the curves (negative correlations between direction and slopes in the 2Y/5Y, 2Y/10Y). The US-Euro catch movement remains in force.
ECB preview: June’s rate cut. The first of not many to come. We expect the ECB to cut its three key interest rates by 25bp at the 6 June meeting. The key element will be the forward guidance, where the risk lies on the “less dovish” side. The “data-dependent” and “meeting-by-meeting” approach should still represent the preferred mantra in the discourse.
We believe that the room for rate cuts in the Deposit Facility Rate (DFR) in FY24 will be 50bp (only one extra 25bp cut after the first in June). As for 2025, we still find that this room may be more contained (and definitely slower) than markets are now discounting (i.e. 100 bp rate cut throughout the whole cycle).
Peripherals rating. Moody’s affirmed its rating/outlook for Italy (Baa3, Outlook Stable), in line with market expectations.
Tactical approach on peripherals: i) we expect Spain will continue to perform better than semi-core countries, supported by more favourable supply-demand factors and stronger macroeconomic scenarios, while performance vs. Italy will mainly depend on market sentiment towards risk assets; ii) we also expect the box POR-SP 5Y-10Y to tighten, with the shape of the Portuguese curve likely to adjust to a slightly flatter level than is currently the case, and more similar to the shape of the Spanish curve.
Weekly supply. On the bills market total issuance will be c.EUR24bn in gross terms and c.EUR16.9bn in net terms (redemptions from Spain). In bonds Austria, Germany, France and Spain wll be active this week. Total issuance is expected to be c.EUR27.5bn in gross terms and c.25.1bn in net terms (due to coupons payment from Italy).