Global Daily – Portugal in the clear?

by: Nick Kounis , Maritza Cabezas

In this publication: DBRS analyst hints that Portugal may keep investment grade rating, which would keep its bonds in ECB QE programme.

Germany’s Ifo points to bottoming out of economy, though momentum still weak. Looking ahead: FOMC to keep rates on hold and maintain cautious tone.


Global-Daily-Insight-26-April.pdf (60 KB)


Portugal may yet keep its only investment grade rating

Germany’s Handelsblatt newspaper reported relatively positive comments on Portugal by a DBRS analyst on Monday, which suggest it may yet keep its only investment grade rating. ‘Fundamentally, the situation hasn’t deteriorated since we last discussed the rating in November’, Adriana Alvarado, a Portugal analyst at DBRS, is quoted as saying in the newspaper. In addition, she noted that ‘the new government seems to be determined to stick to its deficit criteria and last week presented ambitious targets’.


Portugal is facing a credit rating evaluation by DBRS, with the results set to be announced on Friday. This is crucial as DBRS is the only agency that rates Portugal as investment grade and if it were to be downgraded, the country’s debt would become ineligible to continue to be purchased by the ECB as part of its QE programme. It would then need a waiver to stay in, which could require a new ESM programme.


26 apr

Germany’s Ifo index seems to be bottoming out

The closely-watched German Ifo business climate index slipped in April, but the deline was only marginal (106.6 from 106.7 in March), while the expectations component actually rose (to 100.4 from 100). The latter is the better tracker of GDP growth. Overall, we see the survey as suggesting that business confidence is bottoming out, although the expectations index does remain at low levels consistent with weak GDP growth. As such, the likely jump in German GDP in Q1 should be treated with caution. Indeed, it partly reflects special factors and should slow again in Q2. Still, we do expect a modest economic recovery later in the year.


Looking ahead: Fed policymakers to keep policy on hold at April’s FOMC meeting

We expect Fed policymakers to keep the target range for the fed funds rate steady in the April 26-27 meeting and we don’t expect a further increase in rates in the coming months. Our base case is that the Fed will remain on hold in 2016. Although global developments and financial conditions have improved lately, we think that the Fed will remain cautious. There are still downside risks, related to the global economy. China’s economy has stabilized, but the transformation process will remain a bumpy one, while political risks, including Brexit, remain a risk for the global economy. Meanwhile, an increasing concern is the weakness in US GDP growth.


US GDP growth weak…

A few Fed policymakers have recently expressed their concern regarding the slower economic momentum in the US. Fed member Bullard, cited weak growth as a reason for caution on rate rises. Meanwhile, Bill Dudley has expressed that risks to inflation and economic growth remain tilted to the downside. Both are voting members. We think that the FOMC statement will continue to signal caution, with the ‘balanced risk’ assessment set out in December remaining absent from the statement. GDP growth remains weak in the first quarter after an already weak fourth quarter. During the March meeting participants were equally divided as to whether they judged risks to the forecasts of GDP growth to be weighed to the downside or broadly balanced. We think that since March’s meeting, economic data has been generally disappointing and we expect the statement to maintain a cautious tone.


…while inflation outlook remains a concern

On top of this we don’t think that FOMC policymakers will dismiss the risk to the inflation outlook in the upcoming meeting. Therefore we expect the statement to include that the Committee continues to monitor inflation developments closely. Several FOMC participants indicated in March’s minutes that the persistence of global disinflationary pressures or the possibility that inflation expectations were moving lower continued to pose downside risks to the inflation outlook. Indeed, the minutes signaled that some members risks for the FOMC inflation projections were still seen as weighted to the downside.