ITALY: 2026 Budget Proposal Sees 2026 Deficit At 2.8%; Growth and Ratings Key
Italy’s 2026 draft budget was approved by the government yesterday. As has been reported in recent weeks, the government expects the budget deficit to fall to 3% GDP in 2025. The deficit is expected to fall to 2.8% in 2026, 2.6% in 2027 and 2.3% in 2028. The 2026 deficit forecast is slightly more optimistic than current Bloomberg consensus of 3.0% and the EC’s Spring Projection round forecast of 2.9% (which of course do not yet account for the policies incorporated into the budget proposal).
- Having already tightened by ~35bps this year, the 10-year BTP/Bund spread has struggled to sustainably consolidated below 80bps in recent months. Upcoming growth data and ratings action will be key in determining whether further near-term narrowing is plausible.
- Growth: Q3 flash GDP is due on October 30. Consensus (according to Bloomberg’s ECFC page) looks for 0.1% Q/Q growth (vs -0.1% prior). We have previously noted that the main barrier to continued Italian fiscal consolidation is the country’s weak growth trajectory.
- Ratings: Moody’s will review Italy’s rating on November 21 (current rating Baa3, Outlook Positive). Moody's rating is two notches below Fitch and S&P, so at least a one notch upgrade is expected. We still think a one notch upgrade to Baa2 while maintaining a positive outlook seems reasonable.
- Some details of the budget proposal via Politico:
- “While ongoing discussions between the government and banks have yet to yield an agreement on what form the tax would take, the hard-right League, of which Giorgetti is a member, is seeking between €4 billion and €4.5 billion from a range of measures, according to two people familiar with the matter. The measures would also apply to insurers, one of the people said”.
- “Major policies in the draft budget, which Italian lawmakers will study in the coming months, includes a €9 billion cut to income taxes for the Italian middle class to 33 percent from 35 percent and €2 billion to align salaries with the cost of living after years of stagnation.
“The draft, which is due to be sent to the European Commission on Wednesday, also earmarks €3.5 billion for “anti-poverty measures” and €2.4 billion for health care in 2026".
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LOOK AHEAD: Empire Mfg And Potential Bessent-He Presser
US Data/Speaker Calendar (prior, estimate). All times ET
- 09/15 0830 Empire Mfg (11.9, 5.0)
- 09/15 1130 US Tsy $82B 13W & $73B 26W bill auctions
- 09/15 1600 Trump signs Presidential Memorandum
- 09/15 Second day of Bessent-He talks in Madrid, potential presser in European afternoon
Source: Bloomberg Finance L.P., Roll Call, MNI
EQUITIES: The Rolls are active
- As expected there's been a strong pick up in Equity rolls, some investors will favour taking advantage of the lighter start of the Week and ahead of the FOMC to Roll, Square Positions with Triple witching on Friday.
- Around 90% of the front month volume in the Emini is spread related, albeit have traded in small, but the US are starting to come in.
- For the Estoxx (VGU5), 73% of the front Volume is spread related and over 350k spread have already traded today.
US TSY FUTURES: Net Long Cover Most Prominent On Friday
OI data points to a mix of net long cover (TU, FV, UXY, US & WN) and short setting (TY) as Tsy yields pulled away from recent lows on Friday. Net long cover was comfortably more prominent in curve-wide terms.
| 12-Sep-25 | 11-Sep-25 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,485,334 | 4,494,228 | -8,894 | -360,593 |
FV | 6,819,380 | 6,841,853 | -22,473 | -999,406 |
TY | 5,372,837 | 5,367,855 | +4,982 | +341,293 |
UXY | 2,365,713 | 2,372,134 | -6,421 | -586,746 |
US | 1,807,094 | 1,818,959 | -11,865 | -1,697,898 |
WN | 2,011,771 | 2,016,360 | -4,589 | -864,949 |
|
| Total | -49,260 | -4,168,298 |
