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Rebound suggests lower inflation is beginning to support consumption The larger-than-expected increase in retail sales in May more than reversed the rain-driven weakness in April. And with inflation falling back to target, Bank Rate likely to be reduced …
21st June 2024
This page has been updated with additional analysis since first publication. Better news doesn’t mask fiscal challenge awaiting next government May’s public finances figures delivered some better news on the fiscal position after the recent run of …
The G7 loan to Ukraine announced last week and the narrowing window to approve a new debt relief package once the payment suspension with private creditors ends in August has shone the spotlight on Ukraine’s large external financing needs. This Update …
20th June 2024
Having cut the policy rate by 25bp at its last meeting, we think the Riksbank will stick with its guidance that it will keep rates on hold next week. But with inflation likely to fall below 2% in the coming months, policymakers will probably cut the …
We see three scenarios for French fiscal policy in the coming months. Even in the best case the spread of French over German bond yields remains higher than before Macron called an early election. In the worst case there is a fully-fledged bond market and …
The proposal to save governments money by ending interest payments on commercial banks’ reserves is a lot more complicated than some of its advocates suggest. The extreme version could either cause central banks to lose control of monetary policy or …
The Bank of England predictably left interest rates unchanged at 5.25% today but continued to give the impression that the pieces of the puzzle are almost in place for it to cut rates. This lends some support to our view that the Bank will first cut rates …
Overview – The euro-zone has come out of a long period of stagnation and will expand at a moderate pace over the coming two years. The recovery will be faster in some southern economies, such as Spain, than in core economies, notably Germany, while the …
BoE leaves the door open to an August rate cut The Bank of England predictably left interest rates unchanged at 5.25% today but continued to give the impression that the pieces of the puzzle are almost in place for it to cut rates. As a result, we still …
Capital values are close to bottoming out in most sectors as yields have stabilised. However, with no yield compression and moderating rental growth the recovery will be weak by past standards, not helped by a struggling office sector. But residential …
The SNB’s decision to cut the policy rate from 1.5% to 1.25% was probably more influenced by the appreciation of the franc over the last two months than any perceived easing in domestic inflation pressures. In our view, the SNB is unlikely to cut rates …
Investor concerns about the upcoming snap legislative elections have pushed up French government bond yields and we think they will rise further over the rest of the year. This has worsened the outlook for property valuations and in turn we now expect …
This page has been updated with additional analysis since first publication. Norges Bank to be one of last DM central banks to start cutting Norges Bank’s verbal guidance and updated interest rate projections reinforce the message that it won’t start …
SNB cuts rates again, but no further cuts likely this year Today’s decision by the SNB to reduce its policy rate from 1.5% to 1.25% was correctly anticipated by two thirds of economists surveyed by Reuters. (We were in the minority anticipating a hold.) …
The European Commission’s recommendation to open the Excessive Deficit Procedure (EDP) against Poland, Hungary and Slovakia for breaching the EU’s fiscal rules won’t force a drastic change in policymaking, nor will it deal with the structural factors …
19th June 2024
We expect political uncertainty in France to maintain a floor under government bond spreads in the near term, not only in France but also in other vulnerable euro-zone countries. Further ahead, we see scope for spreads to fall back in Greece, Portugal, …
This page has been updated with additional analysis since first publication. Stubborn services inflation still a point of concern for BoE We’ll be discussing the outlook for Bank of England, ECB and Fed policy in a 20-minute online briefing at 3pm BST on …
Easing cycle slows again, limited room for rate cuts in H2 The communications accompanying the decision by the Hungarian central bank (MNB) to cut its base rate by a smaller 25bp today, to 7.00%, were fairly hawkish and support our view that the base rate …
18th June 2024
Data released this morning suggest that May’s surprisingly large jump in euro-zone services inflation may have been due to the most unlikely of culprits: Taylor Swift. So to some extent, the ECB can “shake it off” (apologies). Wage-sensitive inflation …
The tightening of fiscal constraints is putting pressure on politicians to pare back green investment ambitions. But kicking the fiscal can down the road on measures that could accelerate the green transition will probably lead to greater macroeconomic …
The EU Deforestation Regulation (EUDR) will rejig the way commodity imports enter the EU when it comes into force later this year and could lead to premiums for compliant commodities over non-compliant ones. 1. What is the EUDR? The EUDR is a new …
17th June 2024
Emmanuel Macron’s decision to call a snap legislative election has triggered turmoil in French politics that is spilling into its financial markets. But what’s driving market panic? Is France heading for a ‘Liz Truss’-style bond market meltdown? And how …
In the latest episode of The Weekly Briefing from Capital Economics, Group Chief Economist Neil Shearing talks about what’s happening in France and what that means for the bond market. He also assesses the Fed’s June meeting and previews what the Bank of …
14th June 2024
Inflation rises further, another rate hike likely in July The further rise in Russian in inflation to 8.3% y/y in May was stronger than expected, and means that an interest rate hike at the central bank’s next meeting in July now looks all but certain. …
French government bonds and equities have sold off this week, and the euro has weakened. A lot of bad news now seems priced in, but we suspect the discount on French assets is here to stay. Investors have now had some time to digest French President …
The focus in oil markets this week was on the long term with the IEA predicting that oil demand will peak in 2029 while OPEC argued there is no peak in sight. In any case, when the peak occurs is only part of the picture. In its annual oil report, …
EU announces new tariffs on China The immediate macroeconomic impact of the EU’s new tariffs on EV imports from China announced this week are likely to be fairly small. As we noted here , the EU imported 440,000 EVs (€9bn) from China over the past year. …
The 10-year yield spread between government bonds in France and Germany has risen above 80bp, its highest since the euro-zone debt crisis. Should the far-right National Rally be in a position to form a government after the upcoming elections, we suspect a …
Higher levels of housebuilding is a prize that both Labour and the Conservatives seek, evidenced by the identical target of building 300,000 new homes a year published in their manifestos this week. (You can see all of our election analysis here , and …
The focus this week has been on the fallout of the European elections in France because there is a real chance that the parliamentary elections, to be held on 30 th June and 7 th July, will lead to a government led by the far-right Rassemblement National …
Will the outcome of the UK general election move the dial on the UK economic outlook? How much would a Labour government deviate from Conservative economic policy? What does a change of government mean for the UK’s financial and housing markets? Our UK …
This page has been updated since publication with additional analysis. Rise in core inflation likely to be temporary The Riksbank’s target measure of inflation, CPIF, remained at 2.3% in May, but the core measure (CPIF excluding energy) rose slightly for …
BoE watching and waiting for more evidence that inflation will settle at the 2% target But a summer rate cut is more likely than investors expect We think rates will be cut to 3.00% next year, below current market pricing of 4.00% Far more interesting …
13th June 2024
The latest Crane Survey reported that a record high 16.4m sq. ft. of London office space was under construction in Q1. That in part reflects developers delaying projects until the demand outlook becomes more certain. But a decent level of new starts also …
While what’s in and what’s out of the election manifestos is informative, the bigger issue is whether the next government delivers or deviates from its manifesto. This Update sketches out three plausible scenarios and the possible implications for the …
The SNB is likely to keep rates on hold at 1.5% at its meeting next week as inflation in Q2 so far has been in line with the its forecast in March. Moreover, the latest data on wage growth were much stronger than ahead of the March meeting, which we think …
Norges Bank will leave its policy rate at 4.5% next week and reiterate that rate cuts are some way off. We think it will wait until December to start loosening monetary policy. As a reminder, the press release following Norges Bank’s meeting in May said …
NB. Our new and improved interactive Europe Commercial Property dashboard, home to key macro and commercial real estate forecasts, can be found here . Overview – The price correction showed signs of stabilisation in early 2024, but we think further, …
We doubt the outcome of the UK’s general election will have a big impact on UK equities in general. Nonetheless, we still expect them to continue to underperform US equities. We don’t think the Labour Party’s return to power – which the polls suggest is …
This page has been updated with additional analysis since first publication. Output fell and outlook for industry is poor The 0.1% m/m decrease in euro-zone industrial production in April was slightly weaker than the published consensus forecast of 0.2% …
With economic activity strengthening across Emerging Europe and inflationary pressures resurfacing in several countries, we think that the scope for monetary easing in the region this year is relatively narrow. Our interest rate forecasts in most …
Faltering demand and rising supply mean prices will slip back The May RICS survey was the weakest so far this year, as new demand faltered and sales slowed. With the quantity of homes coming onto the market increasing at the same time, prices are likely …
Although the EUR/USD exchange rate is not far above multi-decade lows, we think structural factors mean that the euro is close to “fair value” relative to the US dollar and most other major currencies. So we doubt the euro will rebound against the dollar …
12th June 2024
The current fiscal framework is not perfect and could be reformed to improve investor confidence in the management of the public finances, tilt the composition of spending towards investment and reduce political uncertainty. However, the importance of the …
EU protecting domestic producers but not ending Chinese EV imports Reports that the European Commission will “provisionally apply” additional duties of up to 25% on imports of EVs from China from July, on top of the 10% tariff already in place, are in …
This page has been updated with additional analysis since first publication. Despite stagnating in April, economy will be a tailwind for the next govt The stagnation in GDP in April (consensus 0.0%, CE -0.1%) doesn’t mean the economic recovery has been …
France’s National Rally has advocated policies that would increase the budget deficit and provoke clashes with the EU. During the election campaign, it will probably moderate these views, but the chance of France reducing its deficit to 3% of GDP by 2027, …
11th June 2024
Sluggish economic growth in the euro-zone’s trading partners and a deterioration in competitiveness caused an extremely rare absolute decline in euro-zone export volumes last year. Poor competitiveness will remain a perennial problem, but global growth …
