■ The updated June ECB staff forecasts came in mildly on the dovish side, and imply that the ECB does not see a return to positive growth before mid-2010, with inflation undershooting price stability throughout the forecast horizon. The fact that, against this rather gloomy background, the ECB stated that rates are “appropriate” clearly indicates that it has no appetite for further rate cuts, especially at a time when the economy finally appears to be turning around. We believe that the ECB prefers to accept a weak recovery rather than risking excess monetary expansion and that the current level of the refi rate will remain “appropriate” for a long time, as the recovery will likely be weak and gradual, with core inflation continuing to trend down for a prolonged period.

■ Over the next months, much of debate will be on the implementation of the “credit easing” strategy, especially on sterilization and a possible expansion of the size or scope of the asset purchase program. On the former issue, at the press conference earlier this month, Trichet remained vague and stated that the bank expects the asset purchases to be “automatically sterilized”. On whether or not the program might be extended in scope, Trichet clearly stated that no decision has been taken. In both cases, we think the ECB is buying time to wait and see how the strategy unfolds and how the market reacts.

■ While we welcome the first “green shoots” also in the eurozone, we keep a cautious stance, and avoid reading too much into the first signs of cyclical improvement. However, as it is relatively easy to be on the pessimistic side, we investigated which are the upside risks to our central GDP scenario. A more optimistic outlook would rely on the fulfillment of a series of sequential steps: the quick rebalancing of supply and demand at industrial level, a recovery of global trade and a substantial improvement in the banks’ ability to lend. In turn, given the massive frontloaded job shedding right after the Lehman collapse, a genuine recovery in demand could lead firms to resume hiring sooner than we currently expect.

■ We have also re-assessed potential upside risks on inflation, as inflation fears have resurfaced on the market, spurred by signs of improvement in business sentiment and a more pronounced acceleration in oil prices. One of the main findings of our analysis is that, in order to have CPI inflation rising toward 4% over the forecast horizon, we need a shock on commodity prices very similar to the one seen in 2008, together with a substantial (and unlikely, in our view) stability in core prices through end- 2010. Moreover, at this juncture the inflationary impact of massive liquidity injections does not worry us. Therefore, we remain confident in our long-held view that, over the forecast horizon, the risk of too low inflation outweighs the one of excessively high inflation.

■ 10Y yields have increased in the last month as a result of improved economic sentiment, supply pressure and medium-term inflation worries. 2Y yields have increased after the May NFP as investors have started to focus on exit strategy and rate hikes. We think this is premature and the short end offers value: market expectations are volatile.

■ In the FX space, rising risk appetite, firmer stock markets, higher demand for commodities and concerns about the ballooning US debt call for more USD weakness to come. The euro should also stay firm against the JPY and the CHF, steady against sterling and suffer against the two Nordics.

UniCredit Group