PERU: Analyst Views On BCRP Interest Rate Decision
- BBVA says that the expected decision should have limited immediate impact. As usual, the statement offered limited guidance, and any follow-up commentary from BCRP officials today will be more important, particularly on FX policy. The BCRP has been leaning against further PEN appreciation, allowing some of the accumulated FX swaps to roll off and more recently buying USD in the spot market. At these strong levels, and with the BCRP leaning against FX appreciation, further gains are likely to be much harder fought, and asymmetry may turn more negative for the PEN. For that reason, BBVA has entered a long EURPEN position.
- Goldman Sachs says that there were not any relevant new signals pointing to a shift in the monetary policy outlook, except for some soft confirmation that the bar for cuts remains relatively high. GS maintain their view that the policy rate is likely to remain at 4.25% for the foreseeable future. With a largely closed output gap, well-anchored CPI expectations, and a policy stance virtually in neutral territory, there is limited urgency to adjust rates. In their view, a modest upside bias to the near-term growth outlook, coupled with rising short-term political uncertainty, sets a relatively high hurdle to bring the policy stance below neutral in upcoming meetings.
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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".
LOOK AHEAD: Wednesday Data Calendar: More Fed Speakers, CPI Suspended
Wednesday's CPI and Real Avg Hourly/Weekly Earnings suspended due to the Gov shutdown.
- US Data/Speaker Calendar (prior, estimate)
- 10/15 0700 MBA Mortgage Applications (-4.7%, --)
- 10/15 0830 Empire Manufacturing (-8.7, -1.8)
- 10/15 0930 Fed Gov Miran CNBC Invest in America Forum
- 10/15 1130 US Tsy $69B 17W bill auction
- 10/15 1230 Fed Gov Miran at Nomura Research Forum
- 10/15 1300 Fed Gov Waller moderated discussion: artificial intelligence
- 10/15 1400 Fed Beige Book
- 10/15 1430 KC Fed Schmid townhall (no text)
- Source: Bloomberg Finance L.P. / MNI
JAPAN: Disagreements On Security & Nuclear Hinder Prospect Of CDP-DPFP Alliance
Disagreements over policies regarding security and nuclear power appear to be the key obstacles to an agreement between opposition parties on backing a joint candidate for PM. After a meeting between the leaders of the liberal Constitutional Democratic Party (CDP), libertarian-federalist Japan Innovation Party (Ishin), and conservative populist Democratic Party for the People (DPFP), DPFP leader Yuichiro Tamaki said, "I told [CDP leader] Yoshihiko Noda that the security legislation cannot be recognised as not unconstitutional. Representative Noda said he would maintain the assertion that the security legislation has unconstitutional elements and would not reconsider zero nuclear power."
- The 2015 'Legislation for Peace and Security' saw a reinterpretation of the Japanese constitution, which allows the military to act only in self-defence. The reinterpretation saw Japan's Self-Defence Forces enabled to operate in foreign conflicts under the auspices of 'collective self-defence' for allies.
- The CDP's official policy document says the party would, "...take necessary measures such as abolishing the unconstitutional parts of the security legislation."
- On nuclear power, the document says the CDP would "Not build or expand nuclear power plants, but aim to promptly shut down and decommission all nuclear power plants."
- In contrast, the DPFP supports restarting and expanding Japan's nuclear power sector, as well as boosting investment in defence production and capabilities.
- If these policies prove unmovable red lines for both the CDP and DPFP, it would almost certainly end the prospect of a governing coalition involving the two parties, and limit the chances of them cooperating on a joint PM candidate.
