Robeco: Italian government reverses labour market reforms

Main market events

Peripheral bonds moved more or less in line with German Bunds last week. Initially peripheral markets rallied due to a lack of new negative news, but after Italian finance minister Triamentioned in a Bloomberg interview that both tax cuts as an universal basic income will be part of the next budget, markets widened again. Italian bonds have returned -3.0% year-to-date, Spanish bonds 2.5%, Portuguese bonds 2.0% and Irish bonds 1.2%.

ECB

Some policy makers within the ECB apparently are uneasy about investors pricing in a full 15bp interest rate hike as late as Dec-19, arguing that “a move in September or October next year is on the cards”, albeit with the usual provision that any decisionon rates will depend on the outlook for growthand inflationat the time.

Italy

The newItalian government approved a reduction in the maximum duration of a fixed-term contract from 36 to 24 months. Firing without a ‘just cause’ will have to be compensated with a bigger pay-out (36-months salary, instead of 24). This first piece of legislation by the new government reversessome of thelabour marketflexibility introduced in recent years. 

Italy’s new government will have both tax cuts and a universal  basic income in its very first budget to show financial markets the coalition isn’t backing down from its agenda, Finance Minister Giovanni Tria said in a Bloomberg interview. Although the aim is not to worsen thestructural-budget situation, next year’s deficit “might be higher” than the 0.9 percent target set by the previous government.   

Greece

The Greek central bank welcomed the Eurogroup’s decisionto grant new debt relief measures to Greece. Aside from the improved medium-term debt sustainability analysis, the measures could have immediate benefits, as they enable the ECB to extend the waiver on Greek government bonds to maintain their eligibility as collateral in Eurosystem monetary policy operations.