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PATRIS Fixed Income Weekly Commentary - 26 October 2018

26 Oct 2018

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WEEKLY COMMENTARY

1.The ECB made no changes to its policy or forward guidance, as widely expected. It still sees monthly net asset purchases ending this year, and repeated that interest rates should remain at current level through the summer of 2019. Moreover, the ECB expressed little concern about recent weaker economic data. The next monetary policy meeting is scheduled to take place on 13 December. Focus should be on the details of the reinvestment programme, but also on a possible revision to the economic outlook, as the ECB releases the update to its macroeconomic projections, as well as the confirmation of the end of net asset purchases at the end of December.

2.Credit ratings agency Standard & Poor's should release today its assessment of Italy (BBB/Stable). Last Friday, Moody's downgraded Italy to BBB-/Stable, concluding the review initiated on 25 May, reflecting a material weakening in Italy’s fiscal strength (as the public debt ratio will probably stabilise close to the current 130% of GDP in the coming years, rather than start trending down as previously expected by the rating agency) and the negative implications for medium-term growth of the stalling of plans for structural economic and fiscal reforms. The one-notch downgrade was largely expected. However, the Stable outlook was not a given and therefore was a positive.

3.The European Commission has rejected the Italian 2019 budget. The decision was widely expected. The country should now submit a revised budget within three weeks, given that the current draft has a serious non-compliance with the recommendation issued previously by the EU Council.

4.The Markit flash composite PMI was down by 1.4 points in October to 52.7, the lowest since mid-2016 and well below expectations, suggesting a further slowdown in the pace of real GDP expansion in the region in 4Q18. According to Markit, an export-led slowdown continued to broaden-out to the service sector. Moreover, companies’ expectations of future growth slipped to the lowest for nearly four years, with a near six-year low in manufacturing. 

5.In its latest monthly report, the Bundesbank said that the economic expansion remains intact, but may have come to a temporary halt in the summer quarter due to the car industry, given the transition to new emissions tests.

6.Fitch said that Portugal's 2019 budget draft maintains the commitment to fiscal consolidation, supporting the view that the public debt ratio is on a firm downward trend. The draft budget targets a 2019 fiscal deficit of 0.2% of GDP, down from 0.7% projected for 2018. The primary surplus is seen rising from 2.7% of GDP in 2018 to 3.1% in 2019. The next scheduled Fitch sovereign rating review on Portugal is due on 30 November.

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