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Where we stand: by the ECB’s latest estimation, core inflation will be on track to meet the 2% target in 2026. Germany’s latest CPI reading – 2.0% for June – provided further assurance that inflation may be under control.
Reality check: focus is shifting to broader challenges like geopolitical uncertainty, de-globalisation and AI – as highlighted by the ECB’s latest strategy update.
Why it matters: these discussions will influence the Eurozone’s economic stability and subsequently the ECB’s reaction function over the long run.
The bottom line: tariffs, trade and fiscal will dominate the conversation over the next six to 18 months, but to navigate European macro, investors must also be attuned to structural changes occurring behind the scenes.
Big picture: Germany’s budget framework aims to boost core defence spending to 3.5% of GDP by 2029, increasing annual defence expenditure from €95 billion in 2025 to €162 billion in 2029.
Reality check: with a debt ratio of 63% of GDP, Germany has room to finance these initiatives.
By the numbers: the finance agency plans to raise €118.5 billion in Q3, €19 billion (0.45% of GDP) more than initially planned. Over the legislative period, the finance ministry expects to borrow ~€850 billion, including funds for military and infrastructure projects.
What’s next: long-end bund yields are likely to adjust as markets absorb the increased issuance.
The bottom line: Germany’s fiscal push marks a transformative shift, signalling the end of bund scarcity.
Source: Bloomberg, as at 2024.
* Compared with plan published in December.
Where we stand: the NOK strengthened 3% against the euro between mid-April and mid-June. But Norges Bank’s surprise move could pave the way for currency weakness over the summer.
Zoom out: if oil prices remain steady and the market anticipates a full easing cycle – alongside potential declines in rents – key protective factors for the NOK could erode.
What’s next: domestic liquidity flows are expected to dry up in the coming weeks, leaving the NOK vulnerable to algorithmic flows, impacting both FX and rates.
To the contrary: Norges Bank may reconsider its approach if the NOK weakens significantly, the jobs market improves, or if housing prices surge in response to easing measures.
Source: Norges Bank, as at June 2025.
Flashback: from 2018 to 2022, Italy’s bond spreads were a key source of market anxiety, driven by political and economic instability.
Reality check: politics have been a game-changer. Domestically, Prime Minister Meloni has brought stability, while internationally, her rising stature – especially with the US – has enhanced Italy’s credibility.
Between the lines: international investors diversifying away from US fixed income are favouring BTPs over Spanish or French bonds, citing Italy’s relative political stability and attractive valuations.
What’s next: if Italy’s stability persists, BTPs could potentially trade on par with French OATs, further strengthening the convergence narrative.
The bottom line: Italy’s bond market is benefiting from political stability and investor diversification, pushing spreads to (local) historic lows.
Source: Bloomberg, as at June 2025.
Context: anchoring long-end gilt yields requires structural inflation moderation and credible fiscal consolidation, both of which remain uncertain.
By the numbers: inflation shows signs of easing, with PMIs and CBI selling prices softening, though food prices remain elevated at over 4%.
Reality check: fiscal consolidation is in question as political pressure mounts on the reversal of previously announced spending cuts. Uncertainty lingers over defence spending and productivity, adding to the fiscal credibility challenge.
Investment implications: long-end gilts offer selective opportunities, but the risk/reward continues to favour fading any rallies, as fiscal and inflation uncertainties keep risks elevated and unresolved.
Source: Statista, as at March 2025.
All data sourced from Bloomberg, as at June 2025, unless otherwise stated.
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