Europe Week Ahead: German ZEW, UK CPI, -BoE Minutes, -Retail Sales

thenews 2013.07.13 20:36

The political situation in Portugal remains fragile to say the least, although the threat of imminent snap elections seems to have receded somewhat. The next key step will be the 8th Troika review, which was initially supposed to start on Monday but will likely be delayed to end-August, as requested by the Portuguese government. On balance, there is no urgent need to add to the current bailout envelope right now, and we think the Troika will avoid adding to the negative noise before the German elections.

A resilient financial environment should have supported the German ZEW index in theory, although specific Europe-related risks, in Portugal, Greece or Italy, will likely cap any improvement in business confidence. Adding to the mixed European picture, the DAX index has underperformed US stock indices over the past two months, peripheral yields have been on an upward trend since early May, and German hard data indicators have mostly disappointed (especially new orders and exports). All in all, we would expect the ZEW to move sideways, with a short-term downward bias within a more bullish medium-term trend.

UK CPI inflation is expected to edge up strongly in June, to 3.2% YoY from 2.7% YoY (0.1% MoM), due to unfavourable seasonal factors, quite pronounced in energy prices. As the inflation rate should exceed the 3% threshold, the BoE Governor will be obliged to send a letter to Chancellor Osborne in order to explain the reasons behind that increase in the inflation rate. We expect the Governor to reiterate the temporary nature of the pick-up in the inflation rate and insist on the persistence of slack in the economy, which would bring back CPI inflation close to the 2% target in the medium term.