Europe Economic Weekly: Storing up trouble?

Research evidence excerpt

Europe Economic Weekly: Storing up trouble?

Nomura | Europe Economic Weekly 3 July 2026

Euro area in review

Weaker inflation. A less hawkish ECB.

HICP inflation for June fell by 0.4pp to 2.8% y-o-y. Core HICP inflation, too, edged lower,

with weakness concentrated in services prices. We estimate 0.1pp of the 0.3pp fall in the

y-o-y rate of services HICP inflation was due to airfares, which should rebound in July.

Separately, ECBspeak at Sintra proved more dovish than we expected, and this

dovishness was due to weaker oil prices. Hence, we removed our expectation of a

December ECB rate hike. We still expect a September hike, though, bringing the depo

rate to 2.50%. We believe the shock was significant enough to see further indirect inflation

effects in H2 2026, and the ECB expects core HICP inflation to accelerate in H2 2026.

We remain bearish on France due to political risk

The French Appeals Court will rule on 7 July whether Le Pen can stand as candidate for

the National Rally (RN) in the April 2027 presidential election. Opinion polling indicates

RN will move into the second round, whether the candidate is Le Pen or Bardella.

What matters more is who is pitted against RN in the second round of voting. Opinion

polling suggests RN would comfortably beat most opponents. That said, the race could be

tight if it is against Philippe (centre-right Horizons Party); the candidate who is best placed

to potentially beat RN would be Philippe. And separately, while opinion polling currently

indicates RN would comfortably beat the far-left France Insoumise candidate Mélenchon,

opinion polling for Mélenchon has improved over the past few months.

We believe markets would react most negatively to Mélenchon winning, and we would

expect OAT-Bund spreads to widen in response.