- The ECB stood pat, as expected; Ms. Lagarde turned hawkish during the press conference.
- We still think inflation below 2% over the summer will be enough for a 25bp rate cut in September.
- EZ PMIs for July point to resilience, but also continued fragile growth in the core economies.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Supply and demand analysis on BTPs would suggest a lower yield over the coming years…
- ...But more accurate spread analysis implies it will fall only slightly from current levels out to 2027.
- We expect the BTP-Bund spread to fall to 50bp by year-end and to 30bp by Q1 next year.
Melanie Debono (Senior Eurozone Economist)Eurozone
In one line: Lending standards still tight while demand for loans is rising.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Lending standards for firms were left unchanged in Q2, so they remain tight…
- ...Meanwhile, banks made it harder for households to borrow money, and rejection rates jumped…
- ...Q2’s bank lending survey is one for ECB doves, but only slightly; it won’t prompt a cut this week.
Melanie Debono (Senior Eurozone Economist)Eurozone
- The ECB will keep its powder dry this week, waiting for the September forecasts to decide its next move.
- The range of forecasts for the ECB’s policy rate next year has widened significantly.
We still see the deposit rate falling below 2% this year, setting up hikes by the end of 2026.
Claus Vistesen (Chief Eurozone Economist)Eurozone
In one line: Down, but big revision to the April data suggests Q2 was good.
Melanie Debono (Senior Eurozone Economist)Eurozone
In one line: Still on track to hand the ECB a 25bp rate cut in September.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We’re lowering our Q2 GDP growth forecast for France, but lifting it for Spain and Italy…
- …We now think EZ GDP rose by 0.2% quarter-to-quarter, with the risk tilted to the upside.
- Near-term risks are balanced as we prepare to be marked-to-market on our H2 slowdown call.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Headline and core inflation remain on track to support a 25bp ECB rate cut by September.
- The key difference between our and the ECB’s latest forecast is that we see inflation rebounding in Q4.
- The outlook for the ECB is bi-modal; the Bank will stay at 2.0% in 2026 if it holds fire in September.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The EZ goods trade surplus rose in May, but only because imports fell further than exports.
- Our Nowcast model points to upside risks to our forecast for Q2 growth, but it excludes net trade.
- We will update our Q2 growth forecasts on Friday with the EZ construction data for May.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- Industrial production in the Eurozone slowed in Q2 after a breakneck Q1; what awaits in Q3?
- Leading indicators for manufacturing are mixed; the output PMI has been the best so far this year.
- A reversal of tariff front-running will weigh on output in H2, regardless of what tariffs the EU ends up with.
Claus Vistesen (Chief Eurozone Economist)Eurozone
In one line: Solid rebound, even factoring-in jump in Ireland.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- A 30% US tariff on EU exports would send the EZ economy into recession in the second half of 2025.
- Markets don’t believe Mr. Trump’s tariff threats, but a US-EU escalation cycle is still a big near-term risk.
- The ECB will hold fire in July unless it is absolutely certain a 30% tariff is coming over the summer.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Isabel Schnabel draws another line in the sand for the ECB’s policy rate to stay at 2.0%…
- …but we still think she and other hawks will lose out as dovish data tee up a 25bp cut in September.
- Fair value models point to Bund yields at 2.5%, but fiscal policy and Dutch pension selling say otherwise.
Claus Vistesen (Chief Eurozone Economist)Eurozone
In one line: At target, and risks tilted to the downside over the summer.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- A third of Swiss pharma exports go to the US; a 200% tariff could pull GDP down 4% at the extreme.
- Offsetting factors remain and, in the near term, tariff front-running poses upside risks to our forecasts.
- The maximum direct hit to EZ GDP of a 200% US tariff on pharma is 1%.
Melanie Debono (Senior Eurozone Economist)Eurozone
