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PATRIS Fixed Income Weekly - 24 August 2018

24 Aug 2018



 1.The Minutes to the 31 July - 1 August FOMC meeting confirmed the view that the Federal Reserve will probably hike the fed funds rate target range at the September meeting. Moreover, participants continue to see further gradual increases as consistent with a sustained economic expansion. The Minutes also suggested that the stance of monetary policy could no longer be described as remaining accommodative as sooner as at the September or December meetings. As expected, the Minutes showed further discussion on the meaning of the shape of the UST curve. Jerome Powell's Jackson Hole speech will be at centre stage today (3pm BST).

 2.Further declines in the US economic surprise index, tariff risks and EM concerns continue to push 10-year UST yields lower. The amount of net-short positioning has also been supporting fears of a short squeeze.

 3.The minutes of the ECB's meeting that took place in July showed that the Governing Council was satisfied that the enhanced forward guidance has been understood by financial markets. On the economy, the Governing Council acknowledged a slowdown in the pace of real GDP growth in the euro area, but considered that the current pace is still solid, with risks overall balanced. On the inflation, an increased confidence was expressed. Nevertheless, the account showed a broad agreement regarding the need of an ample degree of monetary policy accommodation to support the further build-up of domestic price pressure over the medium-term.


4.Moody's has decided to extend from 7 September up to end-October its review for possible downgrade from Baa2 on Italy's credit rating (initiated on 25 May), in order to get better visibility on the country's policy direction, including on pensions and labour market reforms. The annual Economic and Financial Document is due to be released by 27 September. That document will increase visibility on the Italian government's fiscal plans, while the draft budget for 2019 is due by 15 October. The risk premium included in BTPs means that Italy has not been trading in line with the Baa2 credit rating for some time already, as at least a one-notch downgrade is probably already priced. Meanwhile, the evolution of BTPs will continue to be a function of headline risk on politics, budget negotiations with the European Commission and economic data for the Italian economy. 

 5.The third adjustment programme for Greece ended on 20 August. The final tranche will allow the country to build a significant cash buffer, probably sufficient to cover Greece's financing needs for almost 2 years, which can support the gradual return to market access.

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