Just waiting for new data … (and central banks’ next steps). No big changes in the overall context, as the main driver of the curves (and most other assets) continues to be the “scrutinising'' of what central banks are mulling. In this sense, there is still quite a differentiated approach between the Fed and the ECB. Regarding the former, data continues to be the main driver, as it is the core of market parctipants’s speculation of whether, when, and how the Fed could start to look for a pivotal scenario in rate policy. As for the ECB, on the one hand, although pure rates expectations continue to look influenced by developments in the USD curves, the approach appears to be gradually shifting from pure rates developments to other types of measures that the ECB will have to tackle.
Change of TLTRO III conditions. The mere change of TLTRO III costs is not a game changer per se, as it merely entails the removal of a windfall benefit for entities and not a cost. Moreover, in the current circumstances with a high degree of uncertainty,it does not seem reasonable to believe that many entities will be willing to renounce to a stable (and cheap) source of financing. Also, carry considerations may also help ease the “temptation” to repay early, as in some cases, other assets mobilised as collateral are still offering some carryand/or may not find many good alternatives at this stage that would justify their unwinding. All this considered, we now believe that the first windows available for early repayment may not be massively utilised by entities to give liquidity back to the ECB.
We still stick to our view that sovereign bond and swap curves still offer room for some additional upward movement in the near future with the real rate component playing a big role. This scenario would still be accompanied by: i) although the steepening in the curves has reached a sudden stop, slopes now look more resilient to any significant additional flattening movement, arguably reflecting the fact they may be building a floor; ii) although US/German spreads may have already seen the peak of the current cycle in early October in the long tenors, we struggle to foresee a steady compression movement materialising any time soon.
Italy’s 2023 fiscal program update: a “prudent, realistic and sustainable” approach helped by inflation projections. The Italian Government published an update to the NADEF on Friday evening with the fiscal and macro figures in its policy scenario for 2023. In general, the new government’s approach to this step confirms our expectation for a balanced mix in setting the fiscal deficit goal using some of the existing fiscal room, using the resources to limit the negative effects of the energy crisis on the economy and excluding any relevant steps with respect to the most costly proposals in the coalition’s programme. However, the higher average deficit in the 2023-2025 period under the policy scenario does not generate significant momentum for real GDP growth in the next three years.
Periphery outlook. With respect to the recent market performance of peripherals bonds, in relative value terms, widespread increases in both yields and spreads has been the norm among peripherals. Italy has seen its yields increasing over the past seven days. Relative to Germany, it has seen yields increasing substantially, and more so relative to our previous issue (when spreads had, for the most part, been compressing). On the other hand, both Spain and Portugal have featured comparatively more positively relative to Italy. In terms of slopes, most areas of peripheral curves have experienced bear-flattening, with the exception of some areas in the short end of the curves, which saw some steepening.
Weekly supply: on the bills market, Germany, France, the Netherlands, Spain, Belgium, the EU and Italy will be active. Total issuance will be c.EUR30.63bn in gross terms and c.EUR19.10bn in net terms. On the bonds market, Germany, the Netherlands, Austria, and Italy and total gross issuance will be c.EUR21.35bn in gross and net terms.