The string of disappointing Italian news continued this week with composite PMI falling below 50 and the EC reporting that Italy’s budget deficit could rise above 3% in 2020.
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Peripheral spreads tightened last week, although on limited news. As widely expected, S&P did not downgrade Italy’s credit rating, and only lowered the outlook to ‘negative’.
After the recent rally in bonds, there is some room to price in a more hawkish trajectory for both the Fed and the ECB, but this remains limited.
The European Commission bluntly rejected Italy’s draft budget plan and Moody’s downgraded Italy to Baa3 but with a stable outlook.
Confrontation between Italy and the European Commission stalls albeit at very elevated levels. After having made it clear that the Italian 2019 draft budget was not in line with EU rule, the European Commission is likely to reject it outright.
The European commission has already communicated that Italy’s fiscal plans involves a significant deviation from the EU fiscal rules. As it remains very doubtful that the Italian government backtracks.