Robeco: Tensions in the Italian government are becoming grow up

Main market events

Peripheral spreads hardly moved this week, the only exception being Italian bonds which continued to tighten further, despite ongoing headlines regarding the 2019 deficit involving a relaxing fiscal stance. The complacency of market vis-à-vis Italy may appear surprising but the mood was rather on a risk-on mode over the past days. Italian bonds have returned -2.9% year-to-date, Spanish bonds 1.7%, Portuguese bonds 1.6% and Irish bonds 0.0%.

ECB

This week, the ECB has communicated its intention to extend the forward guidance beyond the first rate hike. Two speeches from Executive Board Members, Coeure and Praet, were devoted to the rising importance of this monetary policy tool to guide market expectations on the pace of rate hikes. The form of this forward guidance is not clear yet, although Coeure rejected the idea of a precise numerical guidance such as the Fed dots. They need to proceed with caution given the fragility of future inflation path toward their 2% target.

Italy

Disagreements among Italian officials regarding the 2019 fiscal deficit have continued to trigger headlines this week. Surprisingly the market did not react to the proposal by Di Maio on Wednesday to target a deficit of 2.5% of GDP. Meanwhile, the 1.5 %-1.6% objective defended by the Minister of Finance Tria – which would be acceptable for the European Commission – may prove more difficult to reach. A Lega key official, Giorgetti in charge of negotiating the budget has been reported to aim a higher deficit. It could indeed reach 1.7-1.8% and even possibly above 2% but such levels would require “serious and credible proposals, not measures of demagogic type”. Any level between 1.7% and 2% would involve a deviation from a neutral fiscal stance, but of contained magnitude. It is likely that tensions will continue to escalate between 5 Star and the other members of the government, as Di Maio requests EUR 25bn(1.5% of GDP) to finance his basic income electoral promise(EUR 10bn), the flat tax (EUR 7bn) and the pension reform (EUR 8bn).

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