Macro data reality bites (not only in growth and inflation). As we head towards the early-May “cluster of central bank meetings”, the macro data bucket for the next two weeks looks set to gain relevance: apart from the usual suspects (inflation and activity data) any information related to the actual conditions under which the real economy accesses funding will be a key element. The flash data for 1Q23 GDP is expected to show a +0.2% QoQ for the eurozone, compared with 0% QoQ registered in 4Q22, which would leave the YoY rate at c.1.5%.
As for inflation, April flash CPI estimates (countries from 28 April, eurozone on 2 May) will attract most of the attention. The expected moderation of headline inflation in most of the cases should not come as a surprise (or be considered a game changer), as it will still be driven almost entirely by energy components. Of much more interest will be core inflation, which in the most optimistic scenario could see only a modest slowdown of 0.1/0.2 pp.
As for credit conditions, the release of the big banks’ quarterly results for 1Q23 may provide interesting insights, not only on their guidance for future credit conditions but also on their own access to funding (which is particularly relevant in the current environment). This will very likely be complemented by the picture to be drawn by the ECB’s bank lending survey (to be released on 2 May).
Market positioning: maybe a touch too hawkish in the short term? The market's underlying stance seems to be that of “buying” the extremely flexible outlook on the central bank’s foreseeable strategy, consisting of discounting an extremely hawkish approach over the next six months with rates staying at their peak for just six to eight months before starting to come down. Given how conditional this scenario is on the outcome of inflation-related data we are inclined to believe that the risk in this profile of the ESTR forward curve is somewhat biased towards an eventual dovish correction (mostly but not only in the front of the curve). Although this may have some impact on the swap and govies curves, the strength of the bearish undertones over the last few weeks (not only responding to central banks’ expectations but also to the market’s highly confident overall stance) should keep the risk of a downward correction in yields relatively limited
Rating decisions. On 21 April S&P maintained on Italy its rating unchanged at BBB with a stable outlook: even acknowledging a slowdown in the economy in 2023 (to +0.4% YoY) the agency positively assessed how Prime Giorgia Meloni has so far followed a moderate and pragmatic approach in relation to Europe and budgetary policy. Moreover, last Friday, S&P raised its outlook on Greece from stable to positive (particularly important as its rating is just one notch below investment grade). The rating agency noted that Greece showed the most rapid fiscal consolidation within the EU in 2022 and its general government primary balance is now showing a surplus again. In terms of investments, these increased to 21% of GDP at end-2022, up 9% over the last three years and is expected to increase further thanks to the EUR30.5bn of EU funds available to Greece. However, looking at this morning’s performance of the BTPs and GGBs it appears that these decisions were quite expected.
Periphery outlook. The main drivers last week were macro data (UK CPI and German PMI) not specifically related to the peripheral spectrum of government bonds, however, in this context there has been a general widening of the short end credit spread and Italy suffered more than other countries. About Italy, to weigh on the Italian performance has probably contributed to the supply factor (the month-end auction cycle has begun with auctions of the BTP Short Term and the new BTP linker) and it will probably continue this week given the fact the Treasury is expected to announce an offer of a new 10Y at the next auction. Spain showed a less pronounced yield increase and spread widening with respect to Italy, with market participants now focused on when the new SPGB 10Y will be launched. Portugal was the peripheral most sheltered from last week’s yield and spread dynamics, except for the 2Y tenor. In terms of slopes of credit curves, with some concerns about the next two months in terms of dynamic demand/supply factors, we believe the flattening bias in the 2Y-10Y will continue to characterise the overall market approach.
Weekly supply: on the bills market, Germany, France (today), Austria (Tuesday), Italy and Greece (Wednesday) will be active. Total issuance will be c.EUR21bn in gross terms but close to flat in net terms. On the bonds market, Belgium (today), Germany (Wednesday) and Italy (Thursday) will be active. Total issuance will be c.EUR18bn in gross terms and c.EUR7.4bn in net terms.