Indicators show the economy cooling down

• Last FED meeting confirmed a dovish Powell and 3 cuts (dots plots) are expected for 2024, despite better growth forecasts.
• The next Euro inflation data aren’t forecasted to decline but ECB members speeches are confirming the first cut for June.
• Portfolios are always long relative durations, with a neutral exposure to Germany and long Italy; short- medium maturities are overweighted.

In the last week the US Treasury declined to 4.20% after a dovish press conference by Powell. The real rates declined 15 bps in the last days while the BE rates increased around 5 bps. At the last meeting the Fed’s dots plots confirmed 3 cuts in 2024 and revised up its growth forecast until 2026. The FOMC turned more tolerant on inflation, raising its YE forecast by 0.2% to 2.6% but dismissed concerns about the recent data. Powell strongly hinted that the Fed will soon slow the pace of Quantitative Tightening. The market expectations about future cuts are now aligned with the dots plots, pricing 3 cuts within December. The US rates are always expected to move within the range observed in the last weeks; level over the 4.4% should be an area to consider a more constructive stance.

The bund rates declined below 2.35% (-10 bps), with stable BE rates (2.05%) and 5Y inflation expectations (2.3%). Last Euro data showed slightly better numbers regarding economic activity (Zew, PMI, IFO) but they are signaling that the scenario of a stagnating economy is not yet clearly improving. In the next days we will see March CPI data: they are expected stay at the levels of the previous month they should decline in the following observations. Regarding the last intervention of the ECB members, it seems that a consensus is consolidating for a first cut in June. Market is undecided if the ECB will cut 3 or 4 times during the year, as it’s pricing 3.5 cuts. The view remains positive for bund rates at actual levels; the yield curve inversion (10-2 years) around -50 bps is at maximum levels of the past months and it is always expected to tighten. The Bund-BTP spread is consolidating around the 130 bps: we confirm a positive view, and spread could continue to move in range for the moment.

The portfolios confirmed the long relative duration exposures, with a close to neutral exposure for German bonds; Italian BTPs are always  overweight, together with Spain and Greece. The exposures on the yield curve is always long up to the 10 years maturities and underexposed to the long end. The portfolios will continue to implement a long relative duration strategy, waiting for a retracement of core rates around / below the 2.2% area. The BTPs exposure will be overweighted.