BNY’s Geoff Yu argues that European disinflation is allowing focus to shift from emergency inflation control toward growth and fiscal credibility. Yu notes that falling inflation in Poland and Hungary’s fiscal discipline have improved sentiment, but warns that fiscal consolidation must keep pace with easier financial conditions. The NATO Summit is seen refocusing markets on Europe’s defense funding trade-offs.

Disinflation shifts focus to budgets

"June's preliminary inflation prints across Europe show a clear sequential slowdown, driven by the extended ceasefire and lower commodity prices. We expect inflation expectations to continue falling."

"The constraint, however, is no longer energy or supply shocks, but the risk that financial conditions loosen faster than fiscal consolidation. Poland’s full-year fiscal deficit is still expected at 6.8% of GDP, while 37% of this year’s borrowing program remains outstanding."

"Fiscal credibility is now essential for governments seeking to reduce borrowing costs toward pre-war levels, if that’s still achievable. Higher Fed expectations and tighter ECB policy are already exporting tighter financial conditions across Europe, leaving far less monetary policy space."

"Preliminary June inflation releases continue this week, with soft prints expected across the region. Hungarian CPI is forecast at just 1.8% y/y, below target and below expected Czech inflation (2.1% y/y), despite the Czech Republic never experiencing a comparable fiscal impulse."

"The NATO Summit in Ankara is the key political event, with Trump expected to press European allies to shoulder a greater share of defense spending despite increasingly constrained public finances. Recent developments in Europe’s defense sector have weighed on performance, while structural challenges elsewhere in the economy persist."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)