EZ HICP Review: Headline Fails to Fall as Services Inflation Rises on Easter Effect?

May 2, 2025 9:46 AM UTC

EZ HICP inflation failed to fall back toward the 2% target in flash April data, instead staying at 2.2%.  More notably, services inflation jumped 0.4 ppt, very probably due to the impact of the timing of Easter affecting airfares and holiday costs. As was the case when this Easter effect last happe

EZ HICP Preview (May 2): Headline Lower Again But Mainly Energy?

April 24, 2025 8:39 AM UTC

EZ HICP inflation is likely to fall back to the 2% target in flash April data, this six-month low would largely reflect a fall in fuel prices, but with services largely consolidating the clear fall seen last time around (Figure 1).  All of which would mean a stable core reading of 2.4% but where th

Eurozone Flash GDP Preview (Apr 30): The Calm Before the Storm that Surveys May Be Flagging?

April 23, 2025 9:18 AM UTC

Continuing a series of upside surprises, EZ GDP overshot both consensus and ECB expectations in Q4), albeit only after what was a cumulative 0.2 ppt upward revisions compared to the flash. We see a further rise in Q1 data (Figure 1), partly reflecting recent m/m increases in both manufacturing and s

German Data Preview (Apr 30): Lower Headline Amid Stable Services Inflation?

April 22, 2025 1:16 PM UTC

Germany’s disinflation process continues, but there had been signs that the downtrend was flattening out but this changed somewhat in February and again in the March. Indeed, HICP inflation fell back from 2.6% to 2.3% in March, this despite a pick-up in food inflation in both months.  Notably the

ECB Review: Discussing Policy Restriction No Longer Appropriate

April 17, 2025 1:48 PM UTC

A seventh and widely expected 25 bp deposit rate cut was overshadowed by the ECB’s communication shift about the outlook hereafter, no longer talking about how restrictive policy may be.  This shift is entirely appropriate not least given the manner in which financial conditions are now tightenin

Eurozone Banks Offer ECB More Cause for Concern

April 15, 2025 11:14 AM UTC

The ECB can draw comfort from signs that credit demand and supply for EZ households continues to improve.  But the ECB’s latest bank lending survey (BLS) also offers worrying signs in regard to firms as well as questioning the alleged neutrality of the QT program.  It shows a further (admittedly

ECB Preview (Apr 17): Deeper Cuts on Trade Tariffs Broadening Impact

April 9, 2025 8:03 AM UTC

It is surely not a question of whether the ECB cuts rates again at its Apr 17 decision, but what it communicates about policy thereafter.  Not least given the manner in which financial conditions have tightened, the then-notable change in rhetoric last month to suggest the policy stance had become

ECB March Meeting Account – More Focus on Downside Risks than those on the Upside?

April 3, 2025 2:22 PM UTC

The Account of the Governing Council meeting on 5-6 March 2025 seemingly dwelt more on the downside risks posted by trade uncertainties than the upside risks posed by fiscal expansion plans across much of the EU.  It noted that not all members supported the proposal to lower the three key ECB inter

U.S. Tariffs - the EZ/EU Response?

April 3, 2025 10:24 AM UTC

The U.S is imposing a widespread tariff on the EU of 20%, higher and broader than expected, this based on U.S. calculation of an effective tariff rate of in effect 39 per cent, a figure the EU puts at about 1 per cent.  Moreover, rather than including factors such as VAT, and hygiene restrictions o

EZ Data Review: Headline Edges Lower Again With Friendlier Services and Labor Market Messages?

April 1, 2025 9:45 AM UTC

Largely as expected, there was more supportive news in the March flash HICP numbers (Figure 1), with the headline down a notch and core down 0.2 ppt (the former to 2.2% and hence the lowest since last autumn).  Perhaps more notably services inflation slowed more clearly, dropping 0.3 ppt to 3.4%, a

German Data Review: Lower Headline Amid Clearer Drop in Services Inflation

March 31, 2025 12:14 PM UTC

Germany’s disinflation process continues, but there had been signs that the downtrend was flattening out but this changed somewhat in February and again in the March preliminary numbers. Indeed, HICP inflation fell back from January’s 2.8% to a 3-mth low of 2.6% last month and then to 2.3% in Ma

German & EZ HICP Preview (Mar 31/Apr 1): Headline Edges Lower Again With Friendlier Services Messages?

March 25, 2025 1:43 PM UTC

February HICP inflation numbers did deliver better news and broadly and less marginally so after revisions with the headline dropping 0.2 ppt to an as-expected 2.3%.  This ended a run of three successive rises and came about despite a rise in food inflation.  Regardless, the core also eased 0.1 pp

DM Rates Outlook: Policy Divergence

March 25, 2025 9:30 AM UTC

 •    2yr U.S. Treasury yields can step down with cautious  Fed easing on a modest/moderate growth slowdown and also if the Fed keeps an easing bias. 10yr U.S. Treasury yields can be helped by this easing and see a move down through 2025.  However, the budget deficit will likely be 6.5-7.0%

Eurozone Outlook: At A Crossroads?

March 24, 2025 10:45 AM UTC

·       For once in a long while, we have upgraded the EZ activity forecast and for 2026 actually to a notch above consensus thinking. However, the current backdrop still suggests that while the economy has been growing afresh it is doing so timidly, with downside risks persisting more clearl

Uncertainty Over Pace and Scale of Extra European Defense Spending

March 18, 2025 9:05 AM UTC

·       The crucial date for more clarity is the June 24-26 NATO summit.  Donald Trump might attend but will ask for more spending.  NATO head Rutte’s desire is for above 3% of GDP for NATO countries, but the politics and budget suggest that a 2.5% minimum may only be agreed with Germany

Germany: Breakthrough in Attempt to Unlock Debt Brake?

March 14, 2025 12:08 PM UTC

It does seem as if effective German Chancellor-elect Merz now has enough parliamentary support to amend the so-called debt brake and unlock more spending and borrowing to be directed toward added defense and infrastructure.  Thus, it does seem as if Germany and its economy are undergoing a sea-chan

ECB Review: Disinflation Still On Track But Policy now ‘Work in Progress’

March 6, 2025 3:01 PM UTC

Unsurprisingly, the ECB verdict was less important that the rhetoric. A sixth 25 bp discount rate was widely expected – and delivered - to 2.5%, but how wide the door is left open for further cuts may be more opaque.  This both reflects gauging the extent of any lingering degree of policy restric

EZ Bilateral Trade Nuances with the U.S. – Its Imports Not Exports

March 5, 2025 12:56 PM UTC

As the EU/EZ prepares for an almost certain trade spat if not trade war with the U.S. as the latter levies well-flagged and probably significant tariffs, we consider what is actually behind President Trump’s ferocity regarding bilateral trade.  As has been suggested widely, the EZ does not actual

Germany Attempts to Unlock Debt Brake

March 5, 2025 7:42 AM UTC

Germany’s likely new Chancellor Friedrich Merz has (and as has been flagged since his election win last week) announced plans to amend the country’s constitutional fiscal restraints, the so-called debt brake and within the confines of the current parliament.  Merz said Tuesday evening the motto

EZ HICP Review (Mar 3): Headline Edges Lower With Friendlier Services Messages?

March 3, 2025 4:17 PM UTC

February HICP inflation numbers may did deliver better news and broadly but only marginally so (Figure 1) with the headline dropping 0.1 ppt to a higher-than-expected 2.4%.  This ended a run of three successive rises and came about despite a rise in food inflation.  Instead, the core also eased’

German Data Review: Stable Headline but Belated Drop in Services Inflation

February 28, 2025 1:26 PM UTC

As Germany faces possibly deeper and more prolonged political deadlock, its disinflation process continues, but there are signs that the downtrend is flattening out and this may be the message into the rest of 2025. Indeed, as was the case in January, HICP inflation stayed at 2.8% in February, a not

ECB Preview (Mar 6): Gauging Restrictiveness as Policy to be Eased Further

February 27, 2025 1:55 PM UTC

As has been the case at most recent Council meetings, the ECB verdict is less important that the rhetoric. A sixth 25 bp discount rate is widely expected, to 2.5%, but how wide the door is left open for further cuts may be gleaned from any clear change in regard to how near(er) neutral policy the Co

Eurozone: Gauging ECB Neutral Amid a Wandering R-Star

February 26, 2025 12:14 PM UTC

It is clear that, especially with another official rate cut due at the looming ECB Council meeting (Mar 6), the existing debate about how restrictive policy will be may only intensify.  Indeed, the debate is already quite vocal, led by the hawks who are trying to argue for policy pause at least. 

Eurozone: Wages – Good News Comes in Threes?

February 25, 2025 11:40 AM UTC

They say that good things often come in threes.  For the ECB, Q4 data on negotiated wages just released adds to both INDEED compiled wage indicator and the central bank’s own wage tracker data in suggesting softening if not very muted cost pressures, something we attribute to the rising EZ labor

EZ HICP Preview (Mar 3): Headline Back Down With Friendlier Core Messages?

February 24, 2025 3:34 PM UTC

February HICP inflation numbers may deliver better news and broadly so (Figure 1) and thus contrast with the mixed messages in the higher-than-expected January flash HICP numbers.  Indeed, for a third successive month in January, the headline rose but by ‘only’ 0.1ppt, to a six-month high of 2.

Germany: A New but Hampered Government

February 24, 2025 8:53 AM UTC

The German election delivered few surprises with the electorate swinging even more clearly away from the political middle ground.  It clearly means that many difficult decisions lie ahead with questions over the effectiveness of the likely new government.  The result is only likely to inflame US c

Eurozone: More Sobering Economic News

February 21, 2025 10:21 AM UTC

The February composite PMI data may have not fallen (stable at 50.2) and the weaker-than-expected outcome was dominated by sharp addition weakness in France, but the data will be uncomfortable reading for the ECB.   The data very much suggest that the better news regarding EZ consumer spending see

Bunds and ECB Easing/Trump Tariffs

February 20, 2025 8:03 AM UTC

          It is highly likely in April that the U.S. will announce a 25% tariff on EU cars and pharmaceuticals (here) and also reciprocal tariffs against the EU. The majority could be implemented given Trump’s desire to raise revenue/dislike of the EU as well as negotiate trade deals. This

Europe: Economic Consequences of Likely Defence Build-Up

February 18, 2025 3:29 PM UTC

As Europe is forced to consider a massive and rapid ramp up to its relatively mediocre defence spending (Figure 1) as it contemplates a reduction in military support from the US, key questions emerge as the economic effect(s).  Will it boost or inhibit growth, add to inflation, and how will/should

Europe’s Ukraine Political Fallout and Market Hopes

February 13, 2025 12:33 PM UTC

European politicians are surprised and angry at the U.S. stance on a peace deal for Ukraine and less military support for Europe, but eventually they will have to accept the new reality.  Europe is too divided to provide security guarantees to Ukraine on its own. A further increase and acceleration

Europe’s Gas Problem Again?

February 11, 2025 8:30 AM UTC

The ECB staff forecasts on March 6 will be revised upwards for 2025 and 2026, due to the surge in wholesale gas prices.  However, the ECB will likely take the view that 2 round effects from higher gas prices on balance are unlikely to boost core inflation (especially given wage tracker softness) an

Eurozone: The Neutral Rate – Probably Little Changed Recently Unlike Central Banks

February 7, 2025 1:14 PM UTC

A well-advertised research paper from the ECB suggests that the real neutral rate of interest for the EZ has not changed very much in the last few years but with a likely range of between -0.5% and +0.5%, but still well below estimates for what is so-called r* prior to the pandemic (Figure 1).  The

Eurozone: Trump Taking Aim at the EU?

February 5, 2025 9:06 AM UTC

President Trump has made it clear that the EU is going to face US tariffs in the not too distant future.  Admittedly, tariff threats have been used as the basis for negotiation elsewhere, this may be the case for the EU too – as was the case during Trump’s first term.  As for the EU, it does h

EZ HICP Review: Headline Rises Amid Still Friendly Core Messages?

February 3, 2025 10:38 AM UTC

There were mixed messages in the higher-than-expected January flash HICP numbers.  For a third successive month, the headline but this time by ‘only’ 0.1ppt, to a six-month high of 2.5%, but where the core (again) stayed at 2.7%, partly due to what is seemingly relatively stable services inflat

German Data Review: Mixed Inflation News but Politics Dominate?

January 31, 2025 1:28 PM UTC

As Germany faces possibly deeper and more prolonged political deadlock, its disinflation process continues, but there are signs that the downtrend is flattening out and this may be the message into the rest of 2025. Indeed, January HICP inflation stayed at 2.8% an outcome largely as expected.   Bu

ECB Review: Policy Still Restrictive

January 30, 2025 2:34 PM UTC

It was always likely that the ECB verdict at this month’s Council meeting would be less resounding than that seen in December.  A fifth 25 bp discount rate cut did occur, to 2.75%, but may not have seen any demand to at least consider a larger move as was the case last month.  But the door is le

Eurozone Flash GDP Review: Momentum Missing as Divergence Continues?

January 30, 2025 10:31 AM UTC

After a series of upside surprises, EZ GDP both weakened and undershot both consensus and ECB expectations in Q4 (Figure 1). There is a certain irony that for an ECB Council that has evidently shifted its main concern away from broadly falling inflation to real economy weakness, the soft Q4 GDP outc

EZ Monetary Insight: Politics Making Banks More Risk Averse Accentuating EZ Divergences

January 29, 2025 11:01 AM UTC

Ahead of what seems to be a routine decision tomorrow, recent monetary data complicate the policy outlook for the ECB in the months ahead.  Positively, ECB compiled money data show discernible signs of as revival in bank lending, even for companies, although still hardly any growth in real terms. 

EZ HICP Preview (Feb 3): Headline to Slip Amid Friendlier Core Messages?

January 27, 2025 11:42 AM UTC

There were mixed messages in the December HICP numbers.  For a second successive month, the headline rose 0.2 ppt, but to 2.4%, but where the core (again) stayed at 2.7%, partly due to what is seemingly stable services inflation.  Once again, higher energy costs, mainly base effects, were the main

ECB Preview (Jan 30): A Staging Post in Easing Cycle

January 24, 2025 10:32 AM UTC

It is unlikely that the ECB verdict at this month’s Council meeting will be anything like as resounding as that seen in December.  A fifth 25 bp discount rate cut is virtually assured, to 2.75%, but may not see any demand to at least consider a larger move as was the case last month.  Admittedly

German Data Preview (Jan 31): Services Inflation Slows Belatedly?

January 22, 2025 2:09 PM UTC

Germany’s disinflation process continues, but there are signs that the downtrend is flattening out and this may be the message into the rest of 2025.  After a largely energy but a still relatively broad rise to an 11-mth high of 2.8% in December, we see the rate down 0.2 ppt to 2.6% in the prelim

Eurozone Flash GDP Preview (Jan 30): Are Surveys Too Gloomy?

January 22, 2025 11:33 AM UTC

There is certain irony that for an ECB Council that has evidently shifted its main concern away from broadly falling inflation to real economy weakness, its next policy decision arrives on the day of the next GDP release. We see the ECB cutting a further 25 bp but with some Council members again cal

ECB December Council Meeting Account Review: The ‘Last Mile’ Appears to Have Shortened Somewhat?

January 16, 2025 1:27 PM UTC

As the account of the December 11-12 Council meeting noted, a fourth 25 bp discount rate cut was agreed but there appeared to be a minority wanting a 50 bp move. But this account also shows some confusion as to just what the advertised change in forward guidance (in which the ECB accepts that on-tar

BOE QT: A Heavier Burden than Fed/ECB QT

January 16, 2025 11:05 AM UTC

BOE QT is 3.4% of GDP and means the 2025 total funding is 8% of GDP, which helps explain part of the current pressure on gilt yields (here).  This pace is unlikely to change before the BOE review in September 2025, but the QT is partial monetary tightening and will offset some of 125bps of BOE rate

U.S. Yields Drag Germany and France Higher

January 14, 2025 8:15 AM UTC

The EUR real exchange rate is well above the 2014 low, while ECB officials are guiding that more rate cuts are coming.  2yr German yields are unlikely to rise much further and will likely come back down in Q2 (here).  A January 30 ECB cut will likely build more easing expectations, though more of

U.S. Treasuries versus Bunds and Gilts

January 10, 2025 8:10 AM UTC

·        UK Gilts have been dragged higher by rising Treasuries and market concerns that BOE rate cuts will be limited (here), while 10yr Bund yields have also been dragged higher by Treasuries concerns on Fed rate cuts/budget deficit and tariffs.  Multi quarter we see this as overdone. We

EZ HICP Preview (Jan 7): Headline Higher Again, But Core Still Clearly Friendly?

December 31, 2024 10:48 AM UTC

There were mixed messages in the November HICP numbers.  After a downward revision, and thus below consensus thinking, the headline rose 0.2 ppt to 2.2%, but where the core stayed at 2.7%, partly due to what is seemingly stable services inflation.  Higher energy costs, mainly base effects, were th

German Data Preview (Jan 6): Services Inflation Slips?

December 31, 2024 9:53 AM UTC

Germany’s disinflation process continues, with the y/y HICP headline stable at 2.4% in the November estimate, lower than widely expected, albeit where the CPI counterpart rose 0.2 ppt to 2.2%.  This was again in spite of apparently stable or resilient services inflation.  Even so, the core HICP

DM Rates Outlook: Policy and Spread Divergence

December 19, 2024 12:07 PM UTC

•    2yr U.S. Treasury yields can decline initially as the Fed finishes easing (Figure 1), but as the sense grows that the rate cut cycle is stopping, we see the 2yr swinging to a small premium versus the Fed Funds rate – as the market debates the risks of a future tightening cycle.  For 10y