european commission

On Wednesday, the European Commission started a new round of intense discussions on yet another reform of the EU’s fiscal rules, aka the Stability and Growth Pact (SGP)   The SGP has always been the official implementation of the 3% GDP deficit and 60% GDP debt criteria of the Maastricht Treaty, setting up the foundations of the monetary union. It was the instrument to monitor and coordinate national fiscal and economic policies to enforce the deficit and debt limits. established by the Maastricht Treaty. Since its signing in 1997, there have been several reviews, amendments and changes, shifting from a fully rules-based system to longer-term orientations, prevention and more precise correction of excessive public finances. However, the right mix between rules and discretion, short-term and long-term orientation, investment needs and sustainable public debt has never really been found. Currently, for example, the fiscal rules have basically been suspended since the start of the pandemic in March 2020. It is important to remember that in all the previous changes, the 3% deficit and 60% debt thresholds have never been subject of discussion as these limits are laid down in the European Treaties and cannot easily be changed. A new approach with carrots and a powerful stick The European Commission on Wednesday did not propose a new set of fiscal rules but rather presented a new approach and framework to fiscal policy surveillance in the EU. In Eurocrat terms, the Commission presented a communication and not a proposal for a regulation, directive or a change in the EU Treaties, nor a communication which lays out how the European Commission will re-interpret the current rules. Therefore, the European Commission’s proposals are a starting point for what can still be a very long discussion but not the final version of any new set of fiscal rules. The Commission’s new framework keeps the 3% deficit and 60% debt targets untouched but introduces greater flexibility and more adjustments to country-specific situations. EU countries will have to present four-year plans on how to reduce debt, whereas highly indebted countries can be granted an additional three years. These plans will then have to be negotiated with the European Commission and then approved by the European Council. This is very similar to the national reform programmes governments had to present in order to qualify for money from the European Recovery Funds. The debt reduction pace will no longer follow the 1/20th rate of annual debt reduction in excess of 60% of GDP but will be replaced by country-specific formulas, which would also include a debt sustainability analysis. According to the European Commission’s paper, there will be a clear shift towards focusing solely on government expenditures as the relevant policy indicator. In this regards, interest rate payments and cyclical unemployment spending should be excluded from the measurement of an expenditure path. Contrary to what some experts had called for, the European Commission did not propose a new ‘golden rule’, excluding certain public expenditures from deficit and debt calculations. Instead, the European Commission chose a more indirect approach, allowing countries more time to reduce government debt if they commit to growth-friendly reforms and investments. By giving more time to reduce government debt and by opening the door for more flexibility and investments, the European Commission has clearly offered several carrots to the fiscal doves. At the same time, however, the European Commission also emphasized that it actually is willing to use a very powerful stick: the so-called Excessive Deficit Procedure (EDP) on too high government debt. Up to now, governments have only been reprimanded and sanctioned for having budget deficits higher than 3% GDP but the Treaties also foresee an EDP for debt in excess of 60% of GDP. By activating an EDP on debt, any high-debt country would de facto be put under strict surveillance by the European Commission almost forever. Very powerful but politically also highly explosive. It's only the start of a long discussion All in all, the European Commission has finally made the first move in what will probably still be a very long discussion to agree on yet another reform of the fiscal rules. The intentions are clear: the European Recovery Funds and the national reform programmes were a kind of blueprint for a framework which opens the door to country-specific developments and plans and also gives the European Commission more discretionary power. However, while the European Recovery Funds is a source of money for governments, providing an automatic incentive to comply with any rules, the ‘only’ upside for governments to comply with these debt reduction paths is to avoid sanctions. A very different approach. It will only work if the new flexibility and more room for investments is rightly balanced with fully committed and strict enforcement. In any case, it will still take a long while before European governments will find an agreement on any reform of the fiscal rules. Until then, it will rather be financial markets disciplining governments than any new set of rules. Read this article on THINK TagsGovernment GDP Fiscal policy Eurozone Debt Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Summary: Ahead of U.S. inflation data stock markets inched lower on Thursday. The new Twitter Blue has come after a false start over the weekend. The European Commission published its suggestions for reforms on Wednesday. US Dollar held onto overnight gains on Thursday Ahead of U.S. inflation data that could affect the Federal Reserve's rate plans, stock markets inched lower on Thursday but the dollar held onto overnight gains. Investors were alarmed by the potential collapse of a major cryptocurrency exchange. The Fed has quickly raised rates this year in response to sky-high inflation, which has strengthened the dollar and led to U.S. Treasuries and stocks will drop significantly globally. However, earlier this week, optimism that the Fed might be reaching the end of this process helped the STOXX benchmark to a two-month high. release of Americans As investors attempt to position themselves based on when and at what level they believe U.S. interest rates will peak, the CPI data, which is due at 1330 GMT, is the primary event of the day for markets. "Everyone is focused on that and how that will affect the pricing for not only the December Fed meeting but also the peak policy rate pricing." The Fed has quickly raised rates this year in response to sky-high inflation, which has strengthened the dollar and led to U.S. Treasuries and stocks will drop significantly globally. However, earlier this week, optimism that the Fed might be reaching the end of this process helped the STOXX benchmark to a two-month high. release of Americans As investors attempt to position themselves based on when and at what level they believe U.S. interest rates will peak, the CPI data, which is due at 1330 GMT, is the primary event of the day for markets. *GLOBAL STOCKS MOSTLY LOWER AHEAD OF KEY U.S. CPI INFLATION, CRYPTO WORRIES MOUNT - https://t.co/I1tx9LN6S0 pic.twitter.com/XQHvamDLNX — Investing.com (@Investingcom) November 10, 2022 Twitter verification subscriptions The new Twitter Blue has come after a false start over the weekend. The program, which costs $8 per month in the US, gives users access to fast account verification and a blue checkmark that appears next to their tweets and on their profile page. The subscription was not made accessible for Android as of the time this article was being written. It's also unknown when Twitter Blue will launch in regions other than those where it presently operates as of right now. Notably, the membership prompt identifies the $8 monthly pricing as a "limited-time offer" and lists the ability to see half as many advertising and post longer videos as additional bonuses that haven't yet been made accessible but were promised by Twitter owner and CEO Elon Musk. Since completing his takeover of the business over two weeks ago, Musk has promoted paid account verification as a strategy for making Twitter financially sustainable and boosting platform trust. However, many were quick to point out the service was likely to have the opposite effect since practically anyone could pay for verification and then theoretically change their account name to mimic another user when it briefly started rolling out the new Twitter Blue on Saturday. Musk warned users who were impersonating others would need to expressly identify they were running a parody account or face a permanent ban after a few verified "blue-check" users modified their accounts to impersonate Musk. Twitter’s $8 a month Blue subscription with verification has started rolling out https://t.co/R5lJ3r73nx via @engadget — Yahoo Finance (@YahooFinance) November 10, 2022 EU reform suggestions Finally, it is moving once more. The European Commission published its suggestions for reforms on Wednesday, marking a major milestone in the quest to modify the EU's ill-fitting budget rules. The main goal is to accept the unavoidable: that laws must be more straightforward, flexible, and connected to more reliable rewards and penalties that advance rather than obstruct common policy goals like more investment. All of this reflects the mental evolution now taking place in national capitals. Briefly stated, Brussels wants to maintain the Treaty-based references to deficit and debt limits of 3 and 60% of GDP, respectively, but negotiates individual multiyear budget plans that can last up to seven years when combined with agreed investments and reforms. These plans can be as long as four years. The EU begins to grasp its fiscal nettle https://t.co/Mb88QFhyVv | opinion — Financial Times (@FT) November 10, 2022 Sources: twitter.com, ft.com, finance.yahoo.com, investing.com

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

Agriculture – USDA slashes corn and soybean crop ratings The USDA’s latest crop progress report shows that the USDA trimmed its crop condition ratings for US corn and soybean following dry weather conditions. The USDA rated 55% of the corn crop in good-to-excellent condition as of 18 June, lower than 61% a week ago and 70% seen at the same stage last year. Similarly, the agency rated 54% of the soybean crop in good-to-excellent condition, lower than 59% a week ago and 68% seen at the same stage last year. On the other hand, the USDA rated around 38% of the winter wheat crop in good-to-excellent condition, unchanged from a week ago, and up from 30% seen last year. Weekly data from the European Commission show that soft wheat shipments from the EU reached 30.4mt for the season as of 18 June, up 11% YoY. Morocco, Algeria, and Nigeria were the top destinations for these shipments. Meanwhile, EU corn imports stood at 25.3mt, compared to 16.1mt reported a year ago.

The Commodities Feed: Supply risks vs demand concerns Commodity markets largely shrugged off developments in Russia over the weekend, with the focus now back on China demand concerns and the US Federal Reserve.   Energy – Rangebound crude Energy markets largely shrugged off events over the weekend in Russia. Oil opened strongly yesterday, but gave back a lot of these gains as the day progressed. As a result, ICE Brent settled just 0.45% higher on the day. The more hawkish tone from the US Fed appears to be capping oil prices and the broader commodities complex, while there remain broader concerns over China’s economic recovery. Up until now, oil demand indicators for China have been good, with stronger crude oil imports and higher apparent domestic demand. The concern is whether this can continue as there are clearly still some weak spots within the Chinese economy – specifically with industrial production and the property sector. For the oil market, there is little on the calendar for today. ICE Brent August options expire today, which will be followed by the August futures expiring on Friday. The latest open interest data (which is up until Friday) shows that there is still open interest of more than 17k lots at the $75 strike for August call options. Meanwhile, we will also get US inventory numbers from the American Petroleum Institute (API) later in the day. The European natural gas market had a volatile trading session yesterday with TTF trading in a range of EUR5.40/MWh over the day. Obviously, there would have been concerns over the remaining Russian pipeline flows to Europe following developments in Russia over the weekend. However, fundamentals for the European gas market are still bearish in the short term. EU gas storage continues to fill up and is now more than 76% full, well above the 57% seen at the same stage last year and also higher than the five-year average of 60%. In the absence of any significant supply shocks, EU gas storage will hit the European Commission’s target of 90% full well before 1 November. This suggests that later in the summer we could see further pressure on prices and a deeper contango along the forward curve – there is already an almost €20/MWh contango between the August 2023 and December 2023 TTF contract.  

The ADP report on employment in the private sector, published a day before the non-farm payroll data release, was so shocking that it instantly raised expectations for the labor market as a whole, leading to rapid repositioning on Friday before the data release. However, the non-farm payroll figures were significantly weaker than expected, with 209,000 new jobs created (225,000 expected), and data for the previous two months were revised downwards by 110,000. Employment growth is slowing, but the pace remains high. As for wage growth, the figures were an unpleasant surprise for the Federal Reserve. In June, wages increased again by 0.4% instead of the expected 0.3%, and annual growth rates remained at 4.4%, which is higher than the 4.2% forecast. Steady wage growth does not allow inflation expectations to fall, the growth of real rates does not allow the Federal Reserve to start lowering the rate this year.       The U.S. inflation index, which will be published on Wednesday, is the main event of the week and the last important data before the Fed meeting at the end of July. The markets expect an 89% probability of a quarter-point rate hike. Furthermore, the probability of another increase in November has already exceeded 30%, and the first cut is now expected only in May of next year. The U.S. dollar fell after the data release and ended the week weaker than all G10 currencies. The growth of real rates in the current conditions makes a recession in the U.S. almost inevitable.   EUR/USD The Sentix Economic Index for the eurozone has fallen for the third time in a row to -22.5 points, a low since November 2022, and expectations also remain depressed. The eurozone economy has fallen into a recession as of early July. The situation in Germany is even more depressing – the index has fallen to -28.5 points, and the possibility of improvement is ephemeral.     The ZEW index will be published on Tuesday, and the forecast for it is also negative, with a decrease from -10 points to -10.2 points expected in July. On Thursday, the European Commission will present its forecasts. Bloomberg expects that industrial production in the eurozone fell in May from 0.2% y/y to -1.1% y/y, a sharp decline that characterizes the entire eurozone economy as negative and tending to further contraction.   Under the current conditions, the European Central Bank intends to continue raising rates, and even plans to shorten the reinvestment period of the PEPP program. If this step is implemented, a debt crisis, which will put strong bearish pressure on the euro, is inevitable in the face of capital outflows to the U.S. and an expanding recession.   The net long position on the euro has hardly changed over the reporting week and amounts to just over 20 billion dollars, positioning is bullish, there is no trend. However, the calculated price is still below the long-term average and is trending downward.     The euro attempted to strengthen on Friday in light of the news, but it was unable to rise beyond the borders of the technical figure "flag", let alone higher than the local high of 1.1012. We assume that the corrective growth has ended, and from the current levels, the euro will go down, the target is the lower boundary of the "flag" at 1.0730/50. GBP/USD Updated data on the UK labor market will be published on Tuesday. It is expected that the growth of average earnings including bonuses increased in May from 6.5% to 6.8%, and if the data comes out as expected, inflation expectations will inevitably rise. As will the Bank of England's peak rate forecasts. The NIESR Institute expects that further rate increases could trigger a recession.   The cost of credit is rising, and an increase in the volume of bad debts is inevitable in an economic downturn. Inflation did not decrease in May, contrary to expectations, and remained at 8.7%, even though energy prices significantly decreased. Food inflation on an annual basis reached 18.3%, and core inflation at 7.1% is at its highest since 1992. The labor force is decreasing, and if this trend is confirmed on Tuesday, it will almost inevitably result in increased competition for staff, which will mean, among other things, the continuation of wage growth. The Bank of England has already raised the rate to 5%, with forecasts implying two more increases. What does the current situation mean for the pound?   If the economy can keep from sliding into a recession, then in conditions of rising nominal rates, the yield spread will encourage players to buy assets, leading to increased demand for the pound and its strengthening. However, if signs of recession intensify, which could be clear as soon as Thursday when GDP, industrial production, and trade balance data for May will be published, the pound will react with a decrease, despite high rate expectations. After impressive growth two weeks ago, pound futures have stalled at achieved levels, a weekly decrease of just over 100 million has no significant impact on positioning, which remains bullish.  

Elsewhere on the supply side for this year, we no longer expect any euro-denominated bond issuance, as we assumed in our CZGBs outlook at the beginning of the year. The MinFin is currently in discussions with the European Commission to extend the Recovery and Resilience Facility plan and we expect this year's FX needs to be covered fully by European Union money. On the other hand, we do not expect EU money to be involved in covering CZK needs this year.   Financing needs for 2023 (CZKbn)   Significant drop in borrowing needs next year The MinFin recently published an updated funding strategy that didn't bring much new for this year. However, the figures for next year confirmed our earlier calculations of a drop in borrowing needs next year to around 60% of this year's level. This is due to the year-on-year decline in the state budget deficit, but also to low redemptions next year. This should translate into a significant drop in the supply of CZGBs next year. Moreover, the government may involve more money from the EU and supranational institutions, which may further reduce the supply of CZGBs next year.   Total financing needs and CZGBs issuance (CZKbn)    

Spanish elections unlikely to hamper growth outlook The outcome of the Spanish elections could lead to changes in economic policy. However, the reactivation of European fiscal rules in 2024 limits the extent to which fiscal policy can be adjusted, limiting the risk to our growth outlook.   Uncertainty surrounding Spanish elections Following major losses in the recent regional and local elections on 28 May, Prime Minister Pedro Sanchez of the Socialist Workers' Party (PSOE) has called for early elections in Spain. Although the latest polls indicate a shift to the right side of the political spectrum, the outcome of the upcoming elections remains uncertain. If the polls are correct, the conservative People's Party (Partido Popular) will get the most votes, but not the majority to form a government. In such a scenario, the third-largest party, the far-right Vox, will play a decisive role in forming a government. As elections approach in Spain, the political landscape is characterised by high fragmentation and polarisation. Over the past decade, the Spanish political landscape has undergone a significant transformation, with a remarkable increase in the number of parties. This fragmentation has led to greater instability as coalition governments must now be formed, which often rely on a fragile consensus. Based on the latest polls, it seems likely that another coalition government will have to be formed.   How the Spanish election could affect the economic outlook Spain's economy has outperformed that of other eurozone countries over the past year, but is still weighed down by structural weaknesses such as high debt, low productivity and a rigid labour market. Despite a historically low unemployment rate, it is still among the highest in the eurozone and youth unemployment is alarmingly high. Moreover, the country has still not fully recovered from the pandemic, despite last year's impressive growth figures. The elections could also be the starting point of a longer period of political instability, although this is not our baseline scenario. This could happen if the election results make it difficult to form a stable majority, leading to protracted government negotiations. In addition, there is still a real possibility that a clear majority cannot be formed, which would lead to a hung parliament necessitating new elections and prolonging political uncertainty. In such a scenario, crucial structural reforms needed for the economy may be delayed, reinforcing existing weaknesses. Persistent uncertainty about future government policies could also undermine investor confidence and hamper investment activities. If a new right-wing government comes to power, it could bring about a change of course in economic policy. Conservative leader Feijóo has already announced plans for more business-friendly policies and tax cuts, including a proposed income tax cut for people earning less than €40,000 a year. There is also a real chance that the planned closure of nuclear power plants in 2027 will be postponed to secure energy supplies. The extent of these policy shifts will depend on the consensus among coalition partners and the strength of their majority. If the right-wing Conservatives and Vox form a comfortable majority, they will feel more supported to reverse certain previous government policies. Despite a possible change of direction in economic policy, there is little room to shift to a more stimulative fiscal policy. Spain's public debt ratio is one of the highest in the eurozone at 113.2%. Spain ranks below Greece (171.3%), Italy (144.4%) and Portugal (113.9%). According to current forecasts, Spain will overtake Portugal in the ranking this year. This shift is due to a lower expected government deficit in Portugal combined with slightly better growth prospects. Spain recorded a deficit of 4.8% of GDP in 2022, and both our forecast and that of the Bank of Spain suggest that the deficit will remain above the 3% threshold at least until 2025. This level is considered an excessive deficit by the European Commission. The reactivation of European fiscal rules in 2024 will increase pressure on fiscal consolidation measures. Regardless of the election outcome, addressing public finances will be inevitable, further limiting the government's flexibility to pursue more expansionary fiscal policies.   Government debt to GDP ratio, 2022  

Ambitions scaled back Secondly, while growth in activity is fuelling tax receipts, Belgian public finances continue to create problems. The measures taken to support households and businesses in recent years have weighed heavily on public finances and so far have not been offset. Given the deterioration in public finances, the government will have to take the first steps towards fiscal consolidation in order to comply with the requirements of the European Commission. However, with just one year to go before the elections and given that the coalition in place brings together parties that are opposed in socio-economic terms, coming up with clear and effective measures will likely prove a challenge. Even so, we believe that consolidation will have to take place sooner or later. Most of the effort will probably be made after the elections and will follow the formation of a new majority, which is likely to weigh on the dynamics of the economy over the next few years. On top of this, the federal government had originally planned to carry out two major structural reforms (pensions and fiscal). A pension reform was agreed at the beginning of July, but political hurdles have greatly reduced the initial ambitions included in the final agreement. In a nutshell, there will be an incentive to keep employees at work longer, and at the same time, the highest additional pension schemes will be required to contribute more to the legal pension system. This should satisfy the European Commission, which requested certain measures before releasing funds from the Recovery and Resilience Facility (RRF). This agreement is certainly not the major structural reform that was announced. Moreover, it's becoming increasingly clear that the tax reform will not be achieved. Instead, it will be left to the next legislature, which once again limits the ability of the current majority to put public finances back on a sustainable track.   Further decline in inflation story Inflation peaked at 12.3% in October 2022, and fell back to 4.2% in June, thanks mainly to lower energy prices (gas bills down by almost 64% YoY, and electricity bills down by more than 29%). We're now also seeing signs of easing in other areas – and particularly for food products. Overall, our leading inflation indicator (Net Acceleration Inflation Index – see chart below) tends to show that inflation should continue to fall over the coming months. This indicator uses all the categories of goods and services that are included in the consumer price index in order to determine whether upward pressure on inflation is broad-based or not. In June, the proportion of the consumer price index in a deceleration phase now far exceeds the proportion in an acceleration phase, which is a strong sign that the bulk of the inflation wave is behind us.   Leading indicator shows further decline in inflation   The Belgian economy in a nutshell (% YoY)

The green transition takes hold of Germany’s property market More than 60% of the current German housing stock will need to be renovated over the next ten years to meet climate targets set by the European Commission. The transition will come with soaring costs and increasing house price divergence, with energy efficiency expected to rise rapidly to the top of the list of priorities for buyers.   In search of a new equilibrium The German real estate market has entered the expected phase of correction on the back of higher interest rates and weakening real disposable income. In the first quarter, real estate prices were down by some 7% year-on-year. This is not a crash but a correction. At the same time, it will take while before the market is able to reach a new equilibrium. We currently see it reaching a bottom in the second half of the year, followed by a muted recovery in 2024. Financing costs and household income remain the most important drivers of the German real estate market, but factors like location and greenification will add to increased divergence. The real estate sector plays an important role in the country’s efforts to reach climate targets. In 2019, space heating in the private household sector accounted for 17.5% of total energy consumption and is also the source of around two-thirds of final energy consumption in households. Energy is also used for space cooling, heating water, lighting, electrical appliances and cooking. Less than 20% of household energy consumption in Germany is currently covered by renewable energy.   Share of renewable energy sources and heat pumps in total household energy consumption (2021)   It doesn't come as a surprise that the government is now trying to step up to the plate. The highly debated German Building Energy Act (GEG) has determined that from 1 January 2024, all new buildings must be heated by at least 65% with renewable energy. For existing buildings, a 'decision period' is granted until 2028. From 2045 onwards, no more fossil fuels are to be used for heating. However, even the greenest heating system is of little use if energy consumption is still high and energy efficiency remains low thanks to poor insulation. As a result, the EU Commission is aiming for all residential properties in the EU to at least carry an energy label of D by 2033.

12.5 million chances to go green Looking at the age of the German housing stock shows that there is a serious need for substantial renovation. The older a residential property is, the more likely it is that fossil fuels are still being used for heating. In buildings completed before 1979, just one in 100 homes are heated with geothermal and other environmental or exhaust air heat systems. By contrast, in homes built after 2011, these are seen in almost every fourth building. In addition, older homes are generally poorly insulated or glazed so energy consumption remains high, and the energy efficiency class is often poor. Unfortunately, only 3% of the current housing stock was completed after 2011. A survey by the estate agent McMakler in 2021 showed that just 10% of properties built before 1979 are classified in energy classes A, A+ or B. In residential properties built from 2010 onwards, the share is more than 70%. It therefore doesn't come as a surprise that the majority of German residential properties have an energy label of E or worse.   Percentage distribution of efficiency classes by energy demand of the German residential property stock (%)   Plans laid out by the European Commission call for homes to achieve at least an energy efficiency class D by 2033 on a scale that will be standardised at the EU level, ranging from A to G. Based on the current German scale (which ranges from A+ to H), this means that 11 million single and two-family houses as well as 1.5 million multi-family houses – i.e., 64% of the entire German housing stock – will have to be renovated within the next 10 years.   Green comes at a cost Renovation activity has been limited so far. Renovations that resulted in energy savings of more than 60% were only conducted on an average of 0.1% of the German housing stock each year between 2012 and 2016. In the EU, the rate was 0.2%. For Germany to reach the EU's energy label target by 2033, the pace of green renovation would have to increase 65-fold   It is not only about pace but also about funding. Referring to a rule of thumb among experts, housing refurbishments could cost between 400 and 600 euro per square metre. Full modernisation of a flat would roughly cost 505 euro per square metre. Consequently, the cost of realising the European Commission's target of renovating the German housing stock to energy efficiency class D by 2033 could range from anywhere between 740 billion and 1 trillion euro.   Renovation can be quite economical and usually amortises after 11 to 17 years for house owners, or after about 14 years for flat owners. For most homeowners, however, it will initially mean that new financing will have to be taken out in order to be able to afford the financial challenges of the green transition. In Germany, more than half of all homeowners still have an outstanding loan, which may make it difficult to borrow more – especially in view of the current high financing costs and strict lending conditions

Agriculture: Wheat extends decline CBOT wheat futures extended the fall for a fourth consecutive session this morning as worries surrounding the Black Sea dilemma were overshadowed by the prospects of increasing supplies from other major producing nations. Recent reports from the last week’s US crop tour showed that the estimates of the spring wheat yield were higher than the USDA’s latest estimate, whilst France’s soft wheat production is also expected to remain higher than last year. Meanwhile, Russia is expected to increase its overseas shipments of grains to as much as 60mt in the new season. In its latest report, the European Commission projects that the EU’s soft wheat harvest will reach 126.4mt this year, down from 128.9mt estimated in June. The group also trimmed the corn crop projections to 63mt, compared to the earlier estimate of 63.7mt whereas the export estimates were kept unchanged at 32mt. The latest CFTC data shows that money managers turned net bullish in CBOT corn as gross longs outnumbered gross shorts by 26,603 lots as of 25 July, compared to the net bearish bets of 46,926 lots from a week ago. Looking at wheat, the net speculative short positions decreased by 14,086 lots to 40,332 lots over the last reporting week. The move was driven by a drop in gross shorts by 13,674 lots taking the total to 98,192 lots. Meanwhile, speculators increased their net bullish bets for soybean by 24,925 lots for a second consecutive week to 120,739 lots fuelled by an increase in gross longs. For sugar, money managers increased their net bullish positions by 31,980 lots to 178,530 lots. The gross long position in sugar increased by 29,183 lots compared to last week taking the total to 229,126 lots.

Agriculture – Wheat gains on escalating Ukraine-Russia tensions CBOT wheat futures edged higher with the most active contract rising more than 2% this morning due to increasing tensions in the Black Sea region following the Ukrainian attack on Russian ships. According to recent updates about the Ukraine and Russia conflict, Ukrainian drone strikes near the Black Sea port of Novorossiysk, a key hub for Russian grain and oil shipments, led to the closure of the port for several hours. The move was in retaliation for the numerous attacks by Russia on Ukrainian ports. Meanwhile, the latest reports from the Ukrainian Agriculture Ministry showed that the nation's grain shipments rose 29% YoY to 2.4mt as of 4 August. The exports included around 1.2mt of corn (- 3.7% YoY), whilst wheat shipments surged twofold against last year and stood at 880kt. The French agriculture ministry's initial estimates for the season show that the nation's corn harvest for the year is expected to rise to 11.2mt, compared to 10.9mt a year ago. Meanwhile, soft-wheat crop output is now seen slightly higher at 35.6mt, compared to the July estimate of 35mt. Despite the drop in planting, the improvement in harvest projections reflects the better yield after the drought-stricken 2022 which damaged crops. In its latest report, the European Commission reported the EU’s soft wheat exports for the ongoing season at 2.35mt this year as of 30 July, down from 2.7mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Algeria, and South Africa. The commission added that the nation's corn imports in a similar period stood at 1.17mt, down 28% compared to a year ago. The latest CFTC data show that money managers reduced their net bullish bets in CBOT corn by 9,862 lots to 16,741 lots as of 1 August. The fall was led by an increase in gross shorts by 25,065 lots, taking the total to 168,281 lots. Similarly, speculators decreased their net bullish bets in soybean by 26,246 lots to 94,493 lots. The move was fueled by a drop in gross longs by 22,583 lots, taking the total gross longs to 123,815 lots. Meanwhile, the net speculative short positions in CBOT wheat rose by 10,096 lots to 50,428 lots over the last reporting week following an increase in gross shorts.

Agriculture – EU's wheat exports remain soft In its latest report, the European Commission revealed that the EU’s soft wheat exports for the ongoing season stood at 2.92mt as of 6 August, down by 16% compared to 3.48mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Algeria, and Nigeria. The commission added that the nation's corn imports stood at 1.39mt, down 33% compared to a year ago. Cocoa has been trading volatile recently as the weather conditions in the major cocoa-producing countries in West Africa remain uncertain, especially given the current growing season. The weather has turned favourable in some of the countries including Ghana, Ivory Coast and Cameroon with dissipating rains and increasing sunshine which could help the plants to grow and control the diseases. Nigeria witnessed some heavy showers towards the end of July that increased supply risks and supported prices.

Agriculture – Crop tour sees higher yields Reports from the Pro Farmer Midwest crop tour for corn and soybean look promising. The tour reported South Dakota corn yields to be around 157.4bu/acre this year (based on 91 samples), much higher than the 118.45bu/acre from a year ago and the 3-year average of 149.71bu/acre. As for the soybean crop, the pod count average in South Dakota is seen at 1,013, higher than 871.4 pods from last year but slightly below the three-year average of 1,039.71 pods. Meanwhile, reports from Ohio estimate corn yields at 183.94 bu/acre (based on 118 field samples), compared to 174.17 bu/acre a year ago and the 3-year average of 175.64 bu/acre. Soybean pods in Ohio were seen averaging 1,252.93, above the 1,131 pods reported last year and the 3-year average of 1,161 pods. The latest data from the Uganda Coffee Development Authority shows that Uganda’s coffee exports rose 14.5% MoM and 12% YoY to 645,832 bags (60kgs bag) in July. Last month’s shipments were the highest monthly total in over a year due to the attractive global prices and a good crop in the southwestern region. Weekly data from the European Commission shows that soft wheat exports for the season so far fell 21% YoY to reach 4.06mt as of 20 August, down from 5.12mt for the same period last year. Meanwhile, EU corn imports stand at 2.12mt, down 35% from a similar period a year ago. The EU is expected to see a recovery in its domestic corn output this season, which should reduce its import needs.

Spanish tourist season on track to beat pre-Covid levels for the first time 10.1 million foreign tourists visited Spain in July, surpassing the levels seen before the Covid-19 pandemic in July 2019. With such strong figures, it's very likely that more foreign tourists will visit Spain this year than in 2019 – but global warming could soon begin to cloud the possibility of further growth.   Number of foreign visitors above pre-covid levels in July Spain is well on its way to matching or even surpassing its 2019 tourist season. According to figures released this morning by Spain's statistical services, 10.1 million foreign tourists visited Spain in July compared to 9.9 million in 2019, the last year before the Covid-19 pandemic. After two years of travel restrictions, Europeans are hungry to travel abroad again and for many, Spain is still an attractive destination. The UK is still the main source country for Spain, accounting for one in five international visitors. Still, the number of UK visitors is lagging behind slightly, standing at 94% of its 2019 level in July. The weak lira may have convinced many British tourists to change their travel destination to Turkey. The number of German tourists is also still a lot lower than in 2019, but this is more than offset by an increase from other countries.   International tourists arriving in Spain   Spain welcomed 71.7 million international visitors in 2022, which was still 14% less than the number of tourists received in 2019. Spain seems on track to shake off the effects of the pandemic and match the number of foreign visitors in 2019. With the tourism industry holding a significant pace in Spain's economy, it is also currently boosting the country's growth. A surge in international tourist arrivals often leads to increased consumption, ranging from accommodation and transportation to dining and shopping. It also stimulates job creation. As a result, we expect decent growth of 0.3% quarter-on-quarter again in the third quarter of this year. Thanks in part to resurgent tourism, Spain remains one of the leaders in the eurozone after the Netherlands plunged into recession and Germany continues to flirt with one.   Global warming could hit Spanish tourism sector For now, Spanish tourism seems little affected by the country's drought and extreme weather conditions, but this could change in the coming years. A recent report by the European Commission estimates that global warming could lead to a shift in European tourist flows away from the southern coastal regions to more northern shores. They estimate that in the most pessimistic scenario, a rise in temperature of either 3°C or 4°C could reduce the number of tourists during the summer season by 10% in southern coastal cities, while more northern coastal cities would see their numbers grow by 5%. Southern Spain in particular would be hardest hit in such a scenario.

EC downgrades eurozone growth for this year and next Will the ECB be deterred if their forecasts have similar downgrades? EURUSD slips below key support ahead of US inflation data and ECB   The European Commission downgraded its forecasts for the EU this year and next, weighed down by much weaker growth in Germany. The new forecasts won’t come as a major surprise and may even prove overly optimistic over time but they do come days ahead of the next ECB meeting and could tempt some policymakers into voting to pause the tightening cycle. ECB policymakers will obviously be armed with their own forecasts when it comes to the vote but it’s likely their growth expectations will be revised lower on the basis of recent releases. While markets are currently pricing in a pause this week, around 60/40 at the time of writing, I’m probably leaning more toward a final hike before pausing in October. It’s probably easier to justify a hike this week than it may be at the end of next month and I’m not sure there’s enough desire at the ECB to stop at the current rates. Weaker economic readings will probably drive a lively debate and they obviously won’t suggest, if they do hike, that it’s job done, rather more finely balanced. But they can’t ignore the progress in recent months, other economic indicators, and the lag effect of past moves.   A cautious breakout but perhaps still a significant one Recent strength in the US dollar has prompted a breakout against the euro in the last week which may prove to be very significant.   EURUSD Daily Source – OANDA on Trading View   While it continues to trade in a descending channel, the pair has broken below the 200/233-day simple moving average band for the first time since November. It then ran into support around 1.07 which has been a notable level of support in the past and the May low isn’t far below here. The interesting thing is that while the breakout hasn’t been the catalyst for a sharper move lower, yet, the decline isn’t lacking momentum. The MACD and stochastic are continuing to make new lows alongside price. Perhaps the MACD histogram is an exception but even this isn’t particularly clear. A break of the May low could confirm the move and see the sell-off accelerate. But with the US CPI to come on Wednesday and the ECB meeting on Thursday, there may be some apprehension among traders. That may even explain why it’s been more of a cautious breakout until this point.    

Downside risks to the global economy remain Output restrictions from Saudi Arabia and Russia push oil market further into deficit Oil accelerates higher after brief consolidation   Oil prices are creeping higher again on Tuesday, with Brent trading around $92 despite there being a mixed view on the economic outlook. As we heard from the European Commission yesterday, growth in the euro area is going to be relatively minor, with Germany struggling to avoid another recession. The UK has shown a lot more resilience than anticipated but still faces recession risks and marginal growth at best. People are feeling a little more optimistic about the US, with last week’s services PMI backing that up, but even here there are significant downside risks. While China is a big unknown with efforts to stimulate the economy being targeted and far from guaranteed to boost growth substantially. That said, one thing we’re guaranteed is supply to continue to be restricted until the end of the year at least following the recent announcement by Saudi Arabia and Russia. That has created a deficit in the market that is supporting oil prices, with OPEC forecasting that the shortfall will run at around three million barrels per day, accelerating the drawdown in inventories.   Momentum appears to be picking up again The OPEC report gave oil prices an extra boost and that appears to have lifted the momentum indicators with it which could be a bullish signal if it continues.   BCOUSD Daily OANDA on Trading View     There’s no obvious resistance ahead of $100 which isn’t to say it will necessarily reach this level, or quickly, but last time it traded around here it was quite volatile between $90 and $100. An interesting level over the last year or so was $93.50 so it will be interesting to see how it trades around here again. The late-August and early-September rally was quite powerful and if we have now seen a break higher after consolidation, it will also be interesting to see whether that momentum continues or it faces more resistance.    

The CFTC report published on Friday showed that long-term investors are bullish on the dollar. The weekly change was +3.6 billion, and the net short dollar position decreased to -6.9 billion. Among the major world currencies, only the yen has refrained from selling off, while all other currencies saw weekly changes in favor of the dollar. The US inflation data for August will be published on Wednesday. Rising oil prices may lead to a 0.5% m/m increase in overall inflation, which could fuel another Federal Reserve interest rate hike.   However, slowing wage growth could have a positive impact on consumer price growth in the services sector. At the moment, the markets are convinced that the Fed will take a break at the next meeting, the likelihood of a rate hike is only 7%, and the key meeting in this cycle will be in November, which is still far off. We believe that the US dollar is still the main favorite of the foreign exchange market, and investors will continue to buy because the market is convinced of the strength of the US economy. Although the greenback retreated from its previous highs on Monday, the other currencies look weaker. A possible rate hike by the European Central Bank is unlikely to strengthen the euro's position because weak economic data reduce the chances of decisive action by the ECB, and any sign of weakness on the part of the bank will be perceived by markets as another confirmation of the dollar's strength.   EUR/USD The ECB will hold its meeting on Thursday, where a final rate hike of 0.25% is expected. The markets still do not have a consensus on whether this hike will happen next Thursday or if the ECB willtake a pause until the next meeting. The high wage growth rates in the eurozone favor a rate hike. In the second quarter, wage growth was 5.6% y/y, even higher than the 5.4% in the previous quarter and exceeding the ECB's estimate of 5.3%, which was presented in June.   Accordingly, the threat to core inflation remains high, and it is expected to fall to 3% in the second half of 2024. ECB officials are sending mixed signals, and there is no unified position. Some hint at the need to take a pause, while others focus on high core inflation and urge not to stop. The European Commission has lowered its economic growth forecast for the eurozone by 0.3% for 2023 and 2024 to 0.8% and 1.4%, respectively. The inflation forecast for the current year has been reduced to 5.6%, but it has been raised to 2.9% for the following year. The European Commission believes that the ECB will raise rates by 0.25% on Thursday, claiming that the market is leaning toward this opinion.     The European Commission holds a pessimistic view of the prospects for eurozone economic growth, which does not contribute to euro demand. The value of the net long euro position fell by 1.6 billion to 18.2 billion during the reporting week. Net positioning continues to be bullish, and the trend favors selling the euro. The price is below the long-term average, which supports further euro depreciation, but the dynamics are neutral.     EUR/USD, as we suggested a week ago, broke below the lower band of the channel at 1.0764 and headed towards the local low of 1.0634. Traders will likely test the low; the question is whether the euro will break this support on the first attempt, or if a second wave will be needed. In case the euro continues to correct higher, we can expect a retracement to the resistance zone of 1.0790/0810. We consider this scenario less likely, as we believe that the euro will fall further, with the support zone of 1.0605/35 as the target. GBP/USD The pound has slightly recovered from its decline following hawkish comments from the Bank of England. Speaking in Canada, Monetary Policy Committee member Catherine Mann signaled she's likely to support further rate hikes as she sees persistent inflation harder to fight than a downturn. She also said it is a "risky bet", but it's better to make a mistake that can be corrected later, and this implies a call for further rate hikes. The labor market report for August was set to be published on Tuesday, with investors focused on the average earnings growth rate. It is expected that the 3-month measure will remain at 7.8%. Any deviation from the forecast could change rate expectations, potentially leading to increased volatility for the pound. The value of the net long pound position fell by 0.2 billion to 3.6 billion during the reporting week. Despite a fairly deep sell-off in recent weeks, net positioning continues to be bullish, which does not prevent the price from falling.   As expected, the pound successfully tested the support at 1.2545. There are almost no reasons for an upward reversal, and any potential corrective rise is limited by the resistance zone of 1.2545/65. We expect the bearish sentiment to persist. The goal is an update of the local low and a move below 1.2440, with the next target being 1.2290/2310. Here, the pound may find strong support. From a technical perspective, falling below this area would suggest the end of the long-term uptrend.  

EGB curves bear-flattened yesterday, with investors adjusting their positions ahead of upcoming macro events. Gilts were the stars of the day, with their yields declining after July jobs data confirmed a softening of the labor market, while USTs were little changed. European stocks edged moderately lower. Brent rose by 1.5% to USD 92/bbl   Caution has prevailed overnight, as highlighted by the weak performance of Asian stocks as well as US and European stock futures. While USTs are little changed, Bund futures have edged lower following a Reuters report that the ECB might raise its inflation projection for next year to above 3%. EGBs are set to open the trading session under pressure. In FX, EUR-USD has risen towards the 1.0750 area and USD-JPY has reached 147.40. EGB issuance activity will be quite lively today, with Italy, Germany and Portugal selling a total of EUR 13bn. Focus will be on the new 7Y BTP, the fourth and last new benchmark to be issued by Italy in 3Q23. With respect to the macro data, investor focus will be on US CPI data. The inflation report precedes the FOMC meeting by a week and will probably affect the Fed’s decision and, to a lesser extent, the updated economic projections that will be published next Wednesday. August CPI data are expected to show a mixed picture, with headline inflation likely having increased due to higher energy prices (in August, the average oil price was 6% higher than in July), while core inflation probably softened further. If data come in line with our estimates and consensus, the impact on fixed-income securities will probably be negligible as there seems to be consensus among analysts. Although market-based inflation expectations have already risen due to higher energy prices, especially at shorter tenors, their increase has been limited and breakeven rates have remained within the trading ranges of the last three months. Since 10 August, when July CPI data were published, the 10Y UST yield has risen by 20bp, with the real yield component, now close to 2%, contributing almost 100%. This move shows that inflation expectations remain anchored and that the re-acceleration of headline inflation in August is not seen as a major concern for investors or the Fed. On the other hand, the fresh increase in real yields seems to suggest that investors are continuing to reduce their expectations of a recession in the US and a rapid shift towards a looser monetary policy by the Fed. We see credit starting on a more cautious tone today ahead of the release of US CPI data in the afternoon and higher oil prices are weighing on equity markets. The sentiment on the Swedish residential property market declined again in September with more respondents in the monthly SBAB house price survey now seeing prices falling. The market expectation of a further rate hike by the Swedish central bank indicates expectations that further rising borrowing costs and inflation will lead to accommodation becoming less affordable. Swedish residential property prices are around 10% below their peak in March 2022 and market commentators see overall price declines of 20% as possible. For Swedish banks we see a further decline as still manageable given that average LTVs are in the 50-60% rang   Today and tomorrow are set to be two crucial days for the FX market US CPI inflation for August is the key release early this afternoon, but the USD reaction might prove to be complicated. This is because the US data will likely be mixed. We expect a rise in the headline index and a further decline in the core rate. This might spark some USD swings when the data are published but FX majors will probably end today’s session not far from current levels, given the ECB decision tomorrow. For there to be a more directional reaction, both headline and core inflation would have to surprise to the upside or the downside. Since a steady FOMC meeting outcome on 20 September is highly likely at this point, we expect the market reaction to be asymmetric and think that softer-than-expected data (even in the headline component) are unlikely to dent the current USD strength too much. On the other hand, an unexpected and sharp acceleration in the core index is probably needed to force investors to return to pricing in a higher chance of another rate hike in the US next week, which would drive the dollar index (DXY) back towards the recent peak of 105.15. In our view, EUR-USD is set to remain close to 1.0750, after press report suggesting that the ECB expects inflation to remain above 3% next year. Recent lows of around 1.0690 and 1.0770-1.08 are thus the key levels to monitor. Meanwhile, bad economic data in the UK early this morning will likely keep GBP-USD below 1.25. The return of USDJPY to 147 makes it clear that the debate on policy normalization in Japan is not enough to convince investors to ride a yen recovery, while USD-CNY and USD-CNH are likely to remain below 7.30 amid higher funding costs in the offshore market. Early tomorrow morning the decline that we expect in both headline and core inflation data in Sweden is unlikely to prevent another 25bp rate hike by the Riksbank next week. Still, the data will probably weigh somewhat on the SEK at the start of the European session. The PLN looks set to continue to suffer from the NBP’s bold rate cut last week. The HUF will likely trade close to 385 against the EUR after Hungarian Economic Development Minister Nagy hinted at stagnant growth for Hungary this year, while the NBH confirmed that the base rate (now 13%) will replace the 1D depo rate (now 14%) from 1 October. Lastly, the RUB steadying around 95 against the USD further suggests a steady outcome to the CBR meeting on Friday.

Agriculture: EU lowers corn yield estimates In its monthly crop monitoring MARS report, the European Commission estimates that corn yields would drop to 7.26t/ha from a previous projection of 7.45t/ha; this is also below the five-year average of 7.48t/ha. Frequent rains in the larger parts of the northern region and dry conditions across the southern areas continue to impact crop quality and yield expectations. The latest crop progress report from the USDA shows that 51% of the US corn crop is rated in good to excellent condition, which is down from 52% seen in both the previous week and at the same stage last year. The soybean crop condition remained flat over the week, with 52% of the crop rated good to excellent. However, that's down from 55% last year. The spring wheat harvest continues to progress well, with the harvest 93% complete, up from 87% the previous week and in line with the harvest at the same stage last year. Similarly, the report shows that 9% of the corn area was harvested over the week, higher than the 5% reported in the previous week and 7% seen at the same stage last year. The latest data from the Uganda Coffee Development Authority shows that Uganda’s coffee exports rose 14.2% MoM and 48% YoY to a record high of 743,517 bags (60 kg bag) in August, following a healthy harvest in the southwest region. Coffee exports for the season rose 6% YoY to 5.6m bags through until August.

End of Europe’s exemption for ship alliances adds to tough market conditions Europe's planned termination of the so-called 'block exemption rule' that enables container liners to closely cooperate within alliances will limit room to manoeuvre. This particularly applies to the container liners outside of the largest players, and adds to already challenging market conditions.   Europe plans to end the anti-trust exemption for container alliances The European Commission has announced it will not extend the block exemption for container liners which expires 25 April 2024. This exemption enabled container shipping companies with a combined market share of up to 30% to provide joint services to clients, and resulted in the formation of three large alliances, 2M (Maersk, MSC), The Alliance (Hapag-Lloyd, HMM, Ocean Network Express and Yang Ming) and The Ocean Alliance (CMA CGM, Cosco, OOCL, Evergreen), as companies sought to manage capacity and share their networks. The exemption in the cyclical container liner market was first introduced during the global financial crisis in 2009 and extended in 2014 and again in 2022. In the early stage of the pandemic - when container liners suffered unprecedented uncertainty - the regulation was again extended. But with consumers stuck at home shifting their spending to goods, and ports and supply chains across the world congested due to closures and events such as the blockage of the Suez Canal, freight rates skyrocketed, and profits reached record highs in 2021 and 2022. This sparked criticism around the rationale for the exemption among shippers and policymakers.   The golden age in container shipping has ended - but the market structure has also changed Container rates have collapsed since early 2022 and spot rates on Asia to Europe trade have dropped below pre-pandemic levels. The sector has also faced a combination of faltering demand and a flood of newly ordered vessel capacity coming online. However, the European Commission has acted in light of what it sees as structural market changes. There has been consolidation. And on top of this, several liner companies including Maersk, CMA CGM and MSC have actively taken stakes in port terminals, logistics services providers and even air freight services over the past two years. With this ‘integration,’ these companies have developed a presence across supply chains and an ability to offer end-to-end logistics solutions.    End of the exemption makes offering joint services and capacity management more difficult The expiry of the block exemption means that cooperation in terms of joint services will be restricted and managing capacity (by for instance taking out (‘blanking’) sailings) will be more difficult. For some container liners, it will also be more difficult to offer specific port calls to clients. Profits in container shipping have been on a downward track from elevated levels since the second quarter of 2022. Global container volumes have been falling this year and are expected to grow only slightly this year amid global headwinds for trade. At the same time, the market is set to be flooded by a wave of new vessels coming online (TEU-capacity will be expanded by some 27% in 2023-2025) making the conditions in container shipping more challenging.   Alliances won't (necessarily) cease to exist, but room to manoeuvre will be more limited The EU and US have followed the same approach regarding the exemption, with the ruling also under review in the US. Either way, the EU is already part of large trade routes and the lifting of the exemption will limit the room to cooperate and weigh on market conditions, especially for pure container liners. MSC and Maersk decided earlier to dismantle their cooperation, possibly because market leader MSC has become big enough by itself. The other two alliances won’t necessarily cease to exist, but there will probably be a higher regulatory burden for joint operations under general competition rules.  

Monitoring Hungary: The moment of truth approaches In our latest update, we reassess our Hungarian economic and market forecasts. We think that over the coming weeks, it will become clear whether the risks to our base case scenario have materialised. We remain positive but cautious as we await the new data.   Hungary: at a glance The Hungarian government responded to the nine questions from the European Commission, and our sources indicate that the net 90-day review period has recommenced. There are just under 10 days remaining until the final decision. The technical recession probably ended in the third quarter of this year, and the next GDP figure will therefore bring a moment of truth. Nevertheless, a full-year recession cannot be avoided. Recent retail sales and industrial production data have disappointed, and the question remains whether we can expect a turnaround in the short term. Real wages will flip back to positive by September, but we doubt that the impact on consumption will be significant and we expect the labour market to remain tight. Energy price-related consequences of geopolitical risks will be a crucial factor in determining whether the current account will have a slight surplus by the year-end. Recent inflation dynamics have shown more promise than we or the market expected, giving the National Bank of Hungary (NBH) ammunition to argue for larger rate cuts. On the other hand, the biggest question remains whether the risk environment will allow the central bank to continue the rate-cutting cycle at the same pace. While the government revised the 2023 ESA-based deficit target to 5.2% of GDP, we need more evidence to assess whether the updated target can be met or not. The forint survived the first rate cut in the base rate without major damage. After some short-lived weakness and volatility, the forint should continue to strengthen. In the rates space, we can expect further steepening of the IRS curve again, while in bonds we need to see progress in the EU money story and a clearer fiscal policy picture for a significant rally.   Quarterly forecasts   Will the longest technical recession end in the third quarter? Hungary has been in a technical recession for a year now, with economic activity contracting in all sectors except agriculture in the first half of 2023. The positive contribution from agriculture in the second quarter was not enough to pull the economy out of a technical recession, as the collapse in domestic demand weighed on all sectors. This time around, we expect the technical recession to end in the third quarter on the back of the agricultural outperformance. Favourable weather conditions combined with a good harvest season support our view. 14 November will be the moment of truth – when the third quarter GDP data is due. Nonetheless, agriculture alone will prove insufficient in generating a positive balance in the entire economy this year. In our view, a 0.5% recession awaits us in 2023.   Real GDP (% YoY) and contributions (ppt)   Is the deterioration in export sales a turning point for industry? Industrial production surprised on the downside in August, as production volumes declined by 2.4% month-on-month, contributing to a sharp fall in output of 6.1% year-on-year. At a sectoral level, the picture remains unchanged from recent months, with volumes expanding only in the electrical and transport equipment sub-sectors. However, in contrast to the dynamics of recent months, this time export sales deteriorated in line with domestic sales – which may explain the large drawdown in overall output. We suspect that export sales may pick up as the dismal August figure was more the result of factory shutdowns, but subdued global demand limits the export outlook. Nevertheless, barring an ugly surprise in September, the expected industrial performance in the third quarter should be better than in the second quarter. This should help the economy to emerge from its technical recession.   Industrial production (IP) and Purchasing Manager Index (PMI)   Will the turnaround in real wages boost retail sales? The retail sector is suffering from the cost of living crisis. The volume of sales in August fell by 7.1% YoY, while on a monthly basis, the overall volume declined by 0.5%. At the component level, food and fuel sales both contracted, while non-food retailing stagnated compared to last month. These dynamics are broadly in line with those seen in previous months, but the main question now is whether the turnaround in real wages will lead to a pick-up in consumption. We suspect that the answer is no, as we believe that households will mainly deleverage and/or rebuild their savings before consumption picks up. In this regard, the 10-year low in households’ consumer confidence index supports our view. We therefore believe that the impact of the turnaround in real wages will not markedly boost consumption until 2024, leaving the rest of this year’s retail sales figures in the red.   Retail sales (RS) and consumer confidence    

Agriculture – India sugar production to fall 8% YoY in 2023/24 The first advance estimates from the Indian Sugar Mills Association (ISMA) show that gross sugar production (including sugar diverted for ethanol production) in India could fall to around 33.7mt in 2023/24 compared to around 36.6mt in 2022/23 as adverse weather was seen impacting yields. The total acreage under sugarcane is expected to be around 5.7m hectares in 2023/24. Sugar allocation for ethanol production was around 4.1mt for last season and a similar allocation this year would keep net sugar production at around 29.6mt. While net sugar production is sufficient to meet the domestic demand of around 27.9mt, sugar exports from the country could fall significantly in the current season. Ukraine’s Agriculture Ministry reported that the Ukrainian winter grains plantations rose to 4.2m hectares as of 31 October, in line with last year’s plantation. This includes winter wheat crop plantings rising by 6% YoY to 3.7m hectares for the above-mentioned period. Weekly data from the European Commission shows that soft wheat exports for the season so far fell 24% YoY to 9.6mt as of 27 October, down from 12.6mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Nigeria, and Algeria. Meanwhile, the nation's corn imports fell 41% YoY to 5.6mt in the season so far.

Last month's elections in Poland have been a game-changer for the country's future and its relationship with Europe. In this bundle of articles, we look at the incoming coalition's main priorities, examine the fiscal space for its election pledges and discuss the prospects for unlocking more EU funds Poland’s general election result on 15 October has opened new economic growth opportunities, even though the external environment is still unfavourable. The commitments of the new coalition bode well for the rule of law, market re-orientation and Foreign Direct Investment attractiveness. We're not yet done with the campaigning; we still have local government, European and Presidential elections still to come. The fiscal side should remain expansionary. But we see low-hanging fruit, which the new government may use to restore higher potential growth and gradually rebalance its structure toward investments rather than consumption. We see great potential in unlocking private outlays after a few years of local businesses staying in “standby” mode amid high profits. Also, Poland may unlock EU money from the Recovery and Resilience Facility and a new EU budget while attracting FDI investors who perceive Poland as the number one destination for nearshoring but who've been staying on the sidelines. Also, we expect more actions in lagged energy transition, infrastructure, and human capital - while enhancing governance in State Owned Enterprises and other institutions. In this bundle of three articles, we discuss five broad priorities for the new coalition, estimate the available fiscal space for its election pledges on top of already record-high borrowing needs in 2024, and discuss prospects for unlocking EU funds. Poland’s return to the European mainstream and burying the hatchet in the legal conflict with the European Commission should unlock money from the RRF. Two years ago, it was aimed to support post-Covid recovery; in the current context of economic stagnation, it will serve even better as a counter-cyclical measure. The incoming government is ahead of an ambitious task in transforming serious competitiveness, security and climate challenges into new growth engines of the Polish economy through large investment programmes in the military, for energy, infrastructure, and human capital. While waiting for the confidence vote in the Lower Chamber of Parliament in the coming weeks, we think the FX and FI markets reflect investor confidence that massive underweight positions in Polish Government Bonds are no longer justified right now.

Agriculture – Cocoa jumps on supply woes Cocoa futures trading in New York surged to fresh record highs yesterday on the back of a worsening supply outlook from the top producers - Ivory Coast and Ghana. Recent reports suggest that weather conditions and the insufficiency of fertilisers in these countries have resulted in lower output levels. Meanwhile, total cocoa arrivals at the Ivory Coast ports so far this season have dropped to 951.7kt as of 21 January, down 37% for the same period last year.   The latest data from the Indian Sugar Mills Association (ISMA) shows that Indian sugar production dropped 5.3% YoY to 15mt for the 2023/24 season until 15 January. Sugar production has been recovering over the past few weeks and the Association estimates that total sugar production for the 2023/24 season could still be higher than its earlier estimates on improving weather and higher prices for sugarcane to farmers. The Association also requested the government to allow an additional 1-1.2mt of sugar diversion for ethanol production citing sufficient availability for the domestic market. In its latest weekly report, the European Commission revealed that the EU’s soft wheat exports for the ongoing season stood at 17.4mt as of 19 January, down by 7.6% compared to 18.8mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Algeria, and Nigeria. The commission added that the nation's corn imports stood at 9.9mt, down 42% compared to a year ago. Agriculture and Agri-Food Canada (AAFC), in its first estimates for the 2024/25 season, expects Canada’s wheat production to increase 4.2% YoY to 33.3mt. The group estimates yield to rise to 3.23t/ha from 2.99t/ha, whilst harvest area is expected to decline from 10.94m hectares to 10.73m hectares for the 2024/25 season.

Energy Performance of Buildings Directive: A step closer to the finish line The Energy Performance of Building Directive recast is moving a step closer to the finish line by reaching a provisional agreement. Renovation goals for residential and non-residential buildings and the gradual phasing out of fossil fuel heating are part of the changes. Banks are expected to have an essential role in financing the transition.   Introduction The European Union established a strategic agenda to tackle climate change and transform the EU economy into a climate-neutral, green and fair society. The European Climate Law enforced in 2021 marked a major commitment to the transition by making the EU’s greenhouse gas (GHG) emission reduction by at least 55% by 2030 a legal requirement. To reach this target, a set of proposals to revise and update the EU legislation was introduced through the “Fit for 55” package. The legislation proposed amendments in 12 different policy areas ranging from land use and forestry to aviation and maritime transport. One of the most contingent points is the review of the Energy Performance of Building Directive (EPBD), as it contains economic, social and financial characteristics. This piece provides an update on the legislative development of the EPBD following the publication of the provisional agreement by the European Commission.   Fit for 55 quick peak The Fit for 55 package serves as a framework to attain EU climate objectives such as ensuring a just transition, maintaining the Union's competitiveness and positioning the EU as a leader in the fight against climate change. It proposes legislation in the following 12 policy areas: EU emission trading system (ETS) Effort sharing regulation Land use and forestry (LULUCF) Alternative fuels infrastructure Carbon border adjustment mechanism Social climate fund RefuelEU aviation and FuelEU maritime CO2 emission standards for cars and vans Energy taxation Renewable energy Energy efficiency Energy performance of buildings (EPBD) Why the EPBD is a central piece of the EU climate transition European buildings account for 40% of the energy consumed and 36% of energy-related direct and indirect GHG emissions. Tackling these emissions is thus crucial to reach the Union’s emission reduction goal. Furthermore, the EU plan doesn’t only aim to reduce emissions but also intends to ensure that the transition toward a greener society is a just one. Social aspects and implications of the changes are, therefore, an important part of the discussions. This is fundamental to remember when discussing the EPBD recast for several reasons. Firstly, improving the energy efficiency of buildings can be extremely costly. However, this cost varies depending on the country, building type (apartment vs individual home) and current energy efficiency. The EU also notes major differences between countries’ building stock efficiency.   Significant differences in EPC distribution between countries The EU estimates that 75% of the Union building stock is energy inefficient

A step closer to the finish line The European Commission's legislative proposal to revise the EPBD was adopted in December 2021. Since then, the Council of the EU and European Parliament also drafted their own proposals. Each institution proposed a slightly different approach to reach the European objective and enact the transition. In our previous pieces “Energy Performance of Building Directive review: Major renovations ahead” and “Energy Performance of Building Directive review: how will banks be affected?” we looked into both the Commission’s and the Council’s proposals and their expected impacts on the banking sector. After months of Trilogue negotiations, a provisional agreement was reached on 7 December, 2023. The Trilogue sessions aimed to develop a common text reviewing the current EPBD. The last step of the legislative process will be for the European Parliament and Council to vote on the provisional agreement to formally endorse it. If the vote is successful, the policy should be enforced in 2025   Four main changes to the current EPBD This section dives into the main changes the recast makes to the EPBD and how that diverges from the previous policy versions.   Renovation goals Starting with residential buildings, the provisional agreement states that each Member State (MS) will adopt their own national trajectory to reduce its building stock’s average primary energy use. This should be in line with the 2030, 2040, and 2050 targets contained in the MS building renovation plan and should identify the number of buildings, building units, and floor areas to be renovated annually. This is a significant change from the previously proposed policies as these were including renovation targets based on minimum energy performance criteria. Instead, the agreement focuses on diminishing energy consumption across all houses rather than only the worst-performing buildings. The agreement states that the reduction in average primary energy use should be 16% by 2030 and 20-22% by 2035 relative to 2020 levels. MS must reach these reduction targets but are free to choose which buildings to target as well as which political measures to enforce (i.e., minimum energy performance standards, technical assistance, and financial support measures). However, to ensure that the Union’s worst-performing buildings are gradually refurbished, the EPBD review specifies that at least 55% of the decrease in average primary energy use should stem from the renovation of the worst-performing buildings nationally. Worst-performing buildings are defined as buildings which are within the 43% of buildings with the lowest energy performance in the national building stock.   Moving to non-residential buildings, the agreement keeps the reduction target as proposed before the negotiations. Non-residential buildings will, therefore, need to follow Minimum Energy Performance Standards (MEPS) set by Member States. This gradual improvement should lead to the renovation of at least 16% of the worst-performing buildings by 2030 and 26% of those by 2033. Member States will be able to express this threshold in either primary or final energy use. In the case of a seriously damaging natural disaster, a Member State may temporarily adjust the maximum energy performance threshold so that the renovation of the damaged non-residential buildings replaces the renovation of other worse-performing buildings. This should, however, be done whilst ensuring that the percentage of stock undergoing renovation remains stable.   Additionally, all new residential and non-residential buildings will have to have zero on-site emission of fossil fuels as of January 2030 and January 2028 for publicly owned buildings. MS will, nonetheless, be able to exempt certain categories of buildings from the previously explained requirements. For non-residential buildings, they should communicate the criteria for such exemption in the National building renovation plan and compensate the exempted stock with renovation in equivalent improvement elsewhere in their non-residential building stock.