ECB meeting preview: we still have to talk about inflation (as well as credit conditions). We expect the ECB to increase all the main references by 25bp (representing a slowdown in the pace of hikes) and regarding the forward guidance we expect the usual mantra regarding the meeting-by-meeting and data-dependent nature of future policy decisions (the ECB is still comfortable leaving the door open for further rate hikes without any major effort to respond the current hawkish stance reflected in the ESTR forward curve with the discounted terminal rate oscillates around 3.75/3.85% and, in case, considering it convenient to include some nuance regarding the sudden U-turn in rate policy that the market is also discounting.
Moody’s and its rating of Italy. Concerns resurfaced last week that Moody’s is considering downgrading its rating for Italy (after the Draghi Government crisis last July, Moody’s shifted its outlook on the Italian economy from neutral to negative with the current rating just one notch above the threshold of investment grade). The rationale of the decision to modify to negative the outlook was mainly linked to the political risk, concerns about energy supplies, risks that fiscal strength will weaken and, lastly, the execution risk on the country's NRRP (that would be critical given its strong ties with the above-mentioned risks). According to these risk factors, we do not expect Moody’s to downgrade Italy’s rating in the next scheduled window (19 May), in particular given that: i) a prudent fiscal stance of Meloni’s Government; ii) a substantial political stability; iii) the economic prospects have improved (not only for Italy, of course) and Moody’s has revised up its real GDP growth forecasts for 2023 substantially, to +0.3% from -1.4%, with positive effect on the dynamic of public debt. At the moment, the main risk to be monitored seems to be the execution of the NRRP given its contribution to the potential growth rate.
Periphery outlook. The main drivers last week were the stability of the US banking system as well as macro data (CPI and GDP data of European countries). This week, the main catalysts for both yields and spread performance will of course be the flash EU CPI and the outcome of the Fed and ECB meetings. Italy registered a good performance in terms of yield decrease which led to a general bullish steepening of the curve.The good performance of the 10Y tenor was mainly seen on Friday and we tend to interpret this movement as a reaction to the positive Italian macro data and the fact that the supply pressure in the coming weeks should now be limited on that tenor. Spain showed a similar yield decrease and spread widening as Italy. The main difference was in the performance of the 10Y-30Y area, with the Spanish curve experiencing a more pronounced widening in terms of credit risk with respect to Italy that was mainly related to the supply activity this week. In terms of slopes, the good performance of the 5Y tenor determined a flattening vs. 2Y and a steepening vs. 10Y.
Weekly supply. On the bills market, France, Netherlands, Belgium and ESM (today), and Greece and EU (Tuesday) will be active. Total issuance will be c.EUR15.4bn in gross terms and c.EUR9.8bn in net terms. On the bonds market, Germany (today and Wednesday), France and Spain (Thursday) will be active. Total issuance will be c.EUR21.5bn in gross terms but negative c.EUR17.4bn in net terms.