Evelyn Reynolds

Economists see the latest U.K. inflation print, out Wednesday, taking the headline rate near or even below the Bank of England’s 2% target.
That is largely due to energy prices, which fell sharply in April.
Markets remain divided on the chance of a June interest rate cut, and the level of services inflation may be key.

A shopper selects fresh produce from a market stall in the Kingston district of London, UK, on Monday, May 20, 2024. 
Bloomberg | Bloomberg | Getty Images

LONDON — U.K. inflation could be about to hit a major milestone, with some forecasting that a sharp fall in the April print will take the headline rate below the Bank of England’s 2% target.
That would represent a plunge from the current level of 3.2% and could “make or break” a June interest rate cut, economists say.

The decline will largely be driven by the energy market, after the regulator-set cap on household electricity and gas bills came down by 12% at the start of April.
A reading below 2% on Wednesday would be the lowest headline inflation rate since April 2021, and a cooling from the peak of 11.1% hit in October 2022 — when U.K. price rises were among the most severe of all developed economies.
The country has been hit by a range of inflationary pressures, including a persistently tight labor market, weakness in the currency increasing the cost of imports, and steeper rises in gas bills than were seen elsewhere.

‘Momentous’

Ashley Webb, U.K. economist at Capital Economics, said that if the headline rate does fall below 2% in April, as he expects, it would be “momentous.”
“This will be crucial in determining whether the first interest rate cut from 5.25% will happen in June (as we expect) or in August. What’s more important is what happens next. We think inflation will fall further, perhaps even to 1.0% later this year,” Webb said in a Friday note.

A Reuters poll of economists puts the headline estimate slightly higher, at 2.1%.
The Bank of England held interest rates steady at its May meeting, as policymakers sent out signals they were preparing for a rate cut in the summer but declined to zero in on June — as those at the European Central Bank have done.
BOE Governor Andrew Bailey said the latest figures were “encouraging,” but that releases ahead of its June 20 meeting, including two consumer price index prints and two sets of wage growth data, would be crucial.

BOE Deputy Governor Ben Broadbent said in a Monday speech that if inflation continues to move in line with forecasts, it is “possible Bank Rate could be cut some time over the summer.”
As of Tuesday, money market pricing continued to indicate only around a 50% probability of a June cut, rising to 73% in August.

Market overreaction?

Economists at ING see inflation coming in “within a whisker” of 2% in April, but dipping below it in May and staying there for most of the remainder of the year. That is well below the BOE’s own forecast for the rate to be closer to 3% at the end of the year.
“If we’re right, then that should be a recipe for several rate cuts this year. We expect at least three, which is slightly more than markets are pricing. But in the very short term, there’s still some uncertainty over services inflation,” James Smith, ING’s developed markets economist, said in a note Monday.
The most recent inflation print for March showed the core figure, which excludes energy, food, alcohol and tobacco, at 4.2%; and services inflation, a key metric for the BOE, at 6%.

Services inflation is forecast at 5.5% for April.
There is a chance the market will “overreact” to a low headline print on Wednesday, Jane Foley, head of FX strategy at Rabobank, told CNBC by email.
“Both the core and the services inflation number could have greater relevance for the timing of the first rate cut of the cycle. On the assumption that services inflation will still be elevated, the Bank could play a cautious hand and still delay a rate cut until August,” Foley said. More

The report also found that Jaguar Land Rover and Volkswagen bought parts from a supplier the U.S. government had singled out for its practices in Xinjiang.A congressional investigation found that BMW, Jaguar Land Rover and Volkswagen purchased parts that originated from a Chinese supplier flagged by the United States for participating in forced labor programs in Xinjiang, a far western region of China where the local population is subject to mass surveillance and detentions.Both BMW and Jaguar Land Rover continued to import components made by the Chinese company into the United States in violation of American law, even after they were informed in writing about the presence of banned products in their supply chain, the report said.BMW shipped to the United States at least 8,000 MINI vehicles containing the part after the Chinese supplier was added in December to a U.S. government list of companies participating in forced labor. Volkswagen took steps to correct the issue.The investigation, which began in 2022 by the chairman of the Senate Finance Committee, Ron Wyden of Oregon, a Democrat, highlights the risk for major automakers as the United States tries to enforce a two-year-old law aimed at blocking goods from Xinjiang. The Uyghur Forced Labor Prevention Act bars goods made in whole or in part in Xinjiang from being imported to the United States, unless the importer can prove that they were not made with forced labor.In a statement, Mr. Wyden said that “automakers are sticking their heads in the sand and then swearing they can’t find any forced labor in their supply chains.”“Somehow, the Finance Committee’s oversight staff uncovered what multibillion-dollar companies apparently could not: that BMW imported cars, Jaguar Land Rover imported parts, and VW AG manufactured cars that all included components made by a supplier banned for using Uyghur forced labor,” he added. “Automakers’ self-policing is clearly not doing the job.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

Conflicting political visions, competitive jockeying and American dominance stand in the way of a more coordinated and efficient military machine.France and Germany’s recent agreement to develop a new multibillion-dollar battlefield tank together was immediately hailed by the German defense minister, Boris Pistorius, as a “breakthrough” achievement.“It is a historic moment,” he said.His gushing was understandable. For seven years, political infighting, industrial rivalry and neglect had pooled like molasses around the project to build a next-generation tank, known as the Main Combat Ground System.Russia’s invasion of Ukraine more than two years ago jolted Europe out of complacency about military spending. After defense budgets were cut in the decades that followed the Soviet Union’s collapse, the war has reignited Europe’s efforts to build up its own military production capacity and near-empty arsenals.But the challenges that face Europe are about more than just money. Daunting political and logistical hurdles stand in the way of a more coordinated and efficient military machine. And they threaten to seriously hobble any rapid strengthening of Europe’s defense capabilities — even as tensions between Russia and its neighbors ratchet up.“Europe has 27 military industrial complexes, not just one,” said Max Bergmann, a program director at the Center for Strategic and International Studies in Washington.The North Atlantic Treaty Organization, which will celebrate its 75th anniversary this summer, still sets the overall defense strategy and spending goals for Europe, but it doesn’t control the equipment procurement process. Each NATO member has its own defense establishment, culture, priorities and favored companies, and each government retains final say on what to buy.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

Finance ministers from the G7 nations are hoping to finalize a plan ahead of the group’s leaders meeting next month.The United States and Europe are coalescing around a plan to use interest earned on frozen Russian central bank assets to provide Ukraine with a loan to be used for military and economic assistance, potentially providing the country with a multibillion-dollar lifeline as Russia’s war effort intensifies.Treasury Secretary Janet L. Yellen said in an interview on Sunday that several options for using $300 billion in immobilized Russian assets remained on the table. But she said the most promising idea was for Group of 7 nations to issue a loan to Ukraine that would be backed by profits and interest income that is being earned on Russian assets held in Europe.Finance ministers from the Group of 7 will be meeting in Italy later this week in hopes of finalizing a plan that they can deliver to heads of state ahead of the group’s leaders meeting next month. The urgency to find a way to deliver more financial support to Ukraine has been mounting as the country’s efforts to fend off Russia have shown signs of faltering.“I think we see considerable interest among all of our partners in a loan structure that would bring forward the stream of windfall profits,” Ms. Yellen said during her flight to Germany, where she is holding meetings ahead of the Group of 7 summit. “It would generate a significant up-front amount that would help meet needs we anticipate Ukraine is going to have both militarily and through reconstruction.”For months, Western allies have been debating how far to go in using the Russian central bank assets. The United States believes that it would be legal under international law to confiscate the money and give it to Ukraine, but several European countries, including France and Germany, have been wary about the lawfulness of such a move and the precedent that it would set.Although the United States recently passed legislation that would give the Biden administration the authority to seize and confiscate Russian assets, the desire to act in unison with Europe has largely sidelined that idea.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020.
Chatter has spilled into government and finance heavyweights, and has one prominent Wall Street firm wondering if costs associated with the debt pose a risk to the stock market rally.
The CBO estimates that debt held by the public compared to GDP will rise to “an amount greater than at any point in the nation’s history.”
Fed Chair Jerome Powell said recently that “this is something that elected people need to get their arms around sooner rather than later.”

A view shows the U.S. Capitol in Washington, U.S., May 9, 2024. 
Kaylee Greenlee Beal | Reuters

Government debt that has swelled nearly 50% since the early days of the Covid pandemic is generating elevated levels of worry both on Wall Street and in Washington.
The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020. As a portion of the total U.S. economy, it is now more than 120%.

Concern over such eye-popping numbers had been largely confined to partisan rancor on Capitol Hill as well as from watchdogs like the Committee for a Responsible Federal Budget. However, in recent days the chatter has spilled over into government and finance heavyweights, and even has one prominent Wall Street firm wondering if costs associated with the debt pose a significant risk to the stock market rally.

“We’re running big structural deficits, and we’re going to have to deal with this sooner or later, and sooner is a lot more attractive than later,” Fed Chair Jerome Powell said in remarks Tuesday to an audience of bankers in Amsterdam.
While he has assiduously avoided commenting on such matters, Powell encouraged the audience to read the recent Congressional Budget Office reports on the nation’s fiscal condition.
“Everyone should be reading the things that they’re publishing about the U.S. budget deficit and should be very concerned that this is something that elected people need to get their arms around sooner rather than later,” he said.

Uncharted territory for debt and deficits

Indeed, the CBO numbers are ominous, as they outline the likely path of debt and deficits.

The watchdog agency estimates that debt held by the public, which currently totals $27.4 trillion and excludes intragovernmental obligations, will rise from the current 99% of GDP to 116% over the next decade. That would be “an amount greater than at any point in the nation’s history,” the CBO said in its most recent update.

Surging budget deficits have been driving the debt, and the CBO only expects that to get worse.
The agency forecasts a $1.6 trillion shortfall in fiscal 2024 — it is already at $855 billion through the first seven months — that will balloon to $2.6 trillion by 2034. As a share of GDP, the deficit will grow from 5.6% in the current year to 6.1% in 10 years.
“Since the Great Depression, deficits have exceeded that level only during and shortly after World War II, the 2007–2009 financial crisis, and the corona­virus pandemic,” the report stated.
In other words, such high deficit levels are common mostly in economic downturns, not the relative prosperity that the U.S. has enjoyed for most of era following the brief plunge after the pandemic declaration in March 2020. From a global perspective, European Union member nations are required to keep deficits to 3% of GDP.

The potential long-term ramifications of the debt were the topic of an interview JPMorgan Chase CEO Jamie Dimon gave to London-based Sky News on Wednesday.
“America should be quite aware that we have got to focus on our fiscal deficit issues a little bit more, and that is important for the world,” the head of the largest U.S. bank by assets said.
“At one point it will cause a problem and why should you wait?” Dimon added. “The problem will be caused by the market and then you will be forced to deal with it and probably in a far more uncomfortable way than if you dealt with it to start.”

Similarly, Bridgewater Associates founder Ray Dalio told the Financial Times a few days ago that he is concerned the soaring U.S. debt levels will make Treasurys less attractive “particularly from international buyers worried about the US debt picture and possible sanctions.”
So far, that hasn’t been the case: Foreign holdings of U.S. federal debt stood at $8.1 trillion in March, up 7% from a year ago, according to Treasury Department data released Wednesday. Risk-free Treasurys are still seen as an attractive place to park cash, but that could change if the U.S. doesn’t rein in its finances.

Market impact

More immediately, there are concerns that rising bond yields could spill over into the equity markets.
“The huge obvious problem is that the U.S. federal debt is now on a completely unsustainable long-term trajectory,” analysts at Wolfe Research said in a recent note. The firm worries that “bond vigilantes” will go on strike unless the U.S. gets its fiscal house in order, while rising interest costs crowd out spending.
“Our sense is that policymakers (on both sides of the aisle) will be unwilling to address the U.S.’s long-term fiscal imbalances in a serious way until the market begins to push back hard on this unsustainable situation,” the Wolfe analysts wrote. “We believe that policymakers and the market are most likely underestimating future projected net interest costs.”
Interest rate hikes from the Federal Reserve have complicated the debt situation. Starting in March 2022 through July 2023, the central bank took up its short-term borrowing rate 11 times, totaling 5.25 percentage points, policy tightening that corresponded with a sharp rise in Treasury yields.

Net interest on the debt, which totals government debt payments minus what it gets from investment income, have totaled $516 billion this fiscal year. That’s more than government outlays for national defense or Medicare and about four times as much as it has spent on education.
The presidential election could make some modest differences in the fiscal situation. Debt has soared under President Joe Biden and had escalated under his Republican challenger, former President Donald Trump, following the aggressive spending response to the pandemic.
“The election could change the medium-term fiscal outlook, though potentially less than one might imagine,” Goldman Sachs economists Alec Phillips and Tim Krupa said in a note.
A GOP sweep could lead to an extension of the expiring corporate tax cuts Trump pushed through in 2017 — corporate tax receipts have about doubled since then — while a Democratic win might see tax increases, though “much of this would likely go toward new spending,” the Goldman economists said.
However, the biggest issue with the budget is spending on Social Security and Medicare, and “under no scenario” regarding the election does reform on either program seem likely, Goldman said.

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Some consumers are pushing off making big purchases for things like furniture or pools as they deal with high interest rates and pesky inflation.
That can have wide-reaching impacts for everyone from the average shopper to the Federal Reserve in this unique economic moment.

Ordini’s Best Fiberglass Pools contractors work to install a pool, which the company says have dramatically increased in sales due to COVID-19 fears, in Gilbertsville, Pennsylvania, April 26, 2021.
Rachel Wisniewski | Reuters

Americans are kicking the can down the road on some more-costly, traditionally financed purchases as elevated inflation and interest rates bite.
Corporate executives this earnings season have lamented that customers are disinterested in shelling out on big-ticket items for their bedrooms, backyards and everywhere in between. It comes at a pivotal moment for the national economy: the average Joe has been contending with a double-whammy of high prices and borrowing costs, while economists and policymakers are trying to gauge the impact this has made.

This matters because it adds to a growing picture of consumer spending finally slowing down, as experts long anticipated. That means the Federal Reserve may get the sign it’s been waiting for that interest rate hikes have had their intended effects of tightening the economy, which could be good news for investors and consumers.
“The consumer’s purchasing power is limited,” Sleep Number CEO Shelly Ibach told analysts late last month. “As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price and perceived value. And they are deferring higher-ticket, durable purchases.”
Ibach said the mattress industry is in a “historic recession,” with sales likely to continue to decline after two already tough years. The Minneapolis-based company lost more per share and recorded lower revenue than analysts polled by FactSet had anticipated in the first quarter.
Sleep Number isn’t alone. Executives across the consumer arena have been preparing for — and, in some cases, seeing — a slowdown over the last several months. Data from Prosper Insights & Analytics, a partner of the National Retail Federation, shows American adults have been increasingly delaying spending in areas like home improvement and electronics compared with before the pandemic.

“Consumers are still spending, but the sense that we get now is that they’re being a little bit more careful,” said Mark Mathews, the NRF’s executive director of research. “They’re making important choices in terms of how they spend. They’re very, very price sensitive, and, definitely, we are back into a situation where consumers are all about the deal.”

Multiple consumer headwinds

A shopper on the fence about if they feel like an expensive purchase is within budget — likely a more ubiquitous feeling now with hot inflation — would previously lean on paying over a longer period of time by using credit. But those options have fallen out of favor as interest rates rose.
Also, more credit card bills are delinquent, showing that the era of consumers being flush with cash from pandemic stimulus has come to an end. U.S. households are cumulatively more than $70 billion in debt after excess peaked above $2 trillion in August 2021, according to data analyzed by the San Francisco Fed. One research group saw credit card debt rising, while the New York Fed reported that Americans collectively owe more than $1 trillion.
Consumers are usually faced with either high interest rates or inflation, as the Fed typically increases borrowing levels when prices are rising faster than it deems healthy for the economy. But at this moment, annualized inflation, though significantly off peak growth seen earlier in the pandemic, is still well above the central bank’s goal of 2%.
That’s despite the Fed funds rate sitting between 5.25% and 5.50% for about 10 months. For comparison, that rate had a measly midpoint of just 0.13% for more than a year during the pandemic in a bid to stimulate economic growth.
Where the benchmark interest level sits can directly drive variable rates on credit cards. Given that, Sleep Number’s Ibach said credit card delinquencies were one reason for the consumer being stretched. Increases from the Fed can also indirectly influence loan providers to push up interest rates on new borrowing agreements for things like cars or homes.
Leggett & Platt, which makes components like springs for beds, is seeing the effects of both rates and inflation. Specifically, CEO J. Mitchell Dolloff said consumers are shifting their spending to focus on services and affording baseline resources like food amid price pressures, as opposed to pricier, less essential goods. He also cited increased interest rates as another weight on their shoulders.
Wayfair, the furniture e-commerce platform popular among cost-conscious shoppers, said it was having trouble selling its most expensive items. Management cautioned that it was a trend happening across the board with home furnishers.
Retail sales data was flat from March to April, despite economists polled by Dow Jones anticipating monthly growth of 0.4%, according to Commerce Department data released Wednesday. Because this data is adjusted seasonally but not for inflation, it can provide another signal that consumers aren’t keeping up as prices climb.
Economists are quick to note that what feels bad in the short term for consumers can actually have a silver lining in long run. Shoppers feeling unable to pull the trigger on bigger purchases — especially when paired with trends like being more price conscious — can offer justification for the Fed that it’s put enough pressure on the economy to bring inflation under control and clear the way to start lowering rates.
There’s a few other factors at play, according to Mathews, of the retail industry trade group. The pandemic had a pull-forward effect, he explained. Consumers snapped up goods meant to last several years while they were stuck at home during the shutdowns. This may still be unwinding.
And, with a greater focus on value, shoppers may wait until Memorial Day or other periods ripe with deals, Mathews said.

Not the ‘right moment’

Finally, a lot of these big-ticket items are also connected in one way or another to people moving homes, Mathews said. That’s bad news given the chilled housing market, which has been stymied by soaring mortgage rates.
Residential solar company Enphase said any forthcoming cuts to rates — even if fewer than previously anticipated — should help demand in states excluding California. (Installers have become more “flexible” with how they finance in California, CEO Badri Kothandaraman said, which is considered a unique market because of reduced credits.)
Whirlpool cited hiked interest levels as a negative pressure on both housing affordability and discretionary spending, which are both factors for consumers considering appliances like refrigerators or washers. North American volumes were soft in the quarter, and the company continued leaning on promotions to buoy demand, according to CEO Marc Bitzer.

Whirlpool washing and drying machines for sale at a Howard’s Appliances store in Torrance, Calif.
Patrick T. Fallon | Bloomberg | Getty Images

This can bode poorly for retailers hawking these items like Best Buy, which is slated to report earnings later this month. Bank of America analyst Robert Ohmes told clients this week to anticipate soft appliance sales from the Minnesota-based chain.
Lofty interest rates have also hampered housing improvement efforts for those staying put, according to Home Depot. Despite calling the customer “extremely healthy,” finance chief Richard McPhail said these borrowing costs have created a holding pattern on projects like kitchen or bath remodels that began in the back half of 2023.
“It’s not the case of not having the ability to spend,” McPhail told CNBC. “What they tell us is they’re just simply deferring these projects as given higher rates, it just doesn’t seem the right moment to execute.”

A tale of two consumers

Like many other aspects of the economy, this negative trend can be felt most deeply by those at the lower end of the income spectrum. It aligns with the view that the U.S. economic recovery out of the pandemic has been “K”-shaped, meaning the experiences of different classes diverge like arms on the letter.
Economic uncertainty and borrowing levels have both “weighed heavily” on new swimming pool purchases, Pool Corp. CEO Peter Arvan told analysts last month. But there’s a clear disconnect among income cohorts: He said lower-end pools “remain a challenge,” while the pricier options have “steady” demand.
Troubles among the more price-conscious clientele is weighing on the Louisiana-based company. Sales to Pool Corp.’s independent retail customers slid 4% in the first quarter of 2024. That builds on the 8% slip seen over the last three months of 2023.
Generac’s power generators are generally considered a luxury of the financially well-off. Because of that, lifted interest rates likely haven’t hit its clients as hard — and any impact has likely already been felt with levels raised for several months, according to CEO Aaron Jagdfeld.
“These are homeowners that are just less sensitive to movements in interest rates,” Jagdfeld told analysts at the start of this month. “Whatever impact that higher interest rates may have had on the margins — on the edges of the market — we think that’s largely baked in at this point.”
— CNBC’s Melissa Repko, Gabrielle Fonrouge, Jeff Cox and Robert Hum contributed to this report.

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After Mercedes workers voted against joining the United Automobile Workers, the union will have less momentum as it campaigns to organize Southern factories.After suffering a setback at two Mercedes-Benz plants in Alabama on Friday, the United Automobile Workers union’s efforts to organize other auto factories in the South is likely to slow and could struggle to make headway.About 56 percent of the Mercedes workers who voted rejected the U.A.W. in an election after the union chalked up two major wins this year. In April, workers at a Volkswagen plant in Tennessee voted to join the union, the first large nonunion auto plant in the South to do so. Weeks later, the union negotiated a new contract bringing significant pay and benefit improvements for its members at several North Carolina factories owned by Daimler Truck.“Losing at Mercedes is not death for the union,” said Arthur Wheaton, director of labor studies at Cornell University School of Industrial and Labor Relations. “It just means they’ll have less confidence going to the next plant. The U.A.W. is in it for the long run. I don’t think they’re going to stop just because they lost here.”Since its founding in 1935, the U.A.W. has almost exclusively represented workers employed by the three Michigan-based automakers: General Motors, Ford Motor, and Chrysler, now part of Stellantis. And it has long struggled to make headway at plants owned by foreign manufacturers, especially in Southern states where anti-union sentiment runs deep.Workers at the Volkswagen plant had voted against being represented by the U.A.W. twice by narrow margins before the recent union win there. An effort a decade ago to organize one of the Mercedes plants failed to build enough support for an election.Harley Shaiken, a professor emeritus at the University of California, Berkeley, noted that broad union organizing efforts seldom proceeded smoothly. In the 1930s, the U.A.W. won recognition at G.M. and Chrysler but struggled at Ford, which continued employing nonunion workers for a few years.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

“Markets sometimes are underestimating the potential impact of geopolitical risks that are there,” European Central Bank Vice-President Luis de Guindos told CNBC.
Stock markets soared to record highs this year despite half the world heading for elections this year and ongoing wars in the Middle East and Ukraine.
“What we are saying is that this is a potential vulnerability. That is a risk that we have to take into consideration when looking forward,” De Guindos said.

Europe’s macroeconomic outlook is brighter — but markets may be underestimating the potential for sudden destabilization due to geopolitics, the vice-president of the European Central Bank said Thursday.
“We are talking about the electoral cycle that is going to take place not only in the U.S., but as well in Europe. And simultaneously, we are referring to geopolitical risks. I think that, you know, markets sometimes are underestimating the potential impact of geopolitical risks that are there,” Luis de Guindos told CNBC’s Annette Weisbach.

Markets are good at calibrating financial and economic risks but struggle to incorporate the separate dimension of geopolitical risk which is often viewed as an all-or-nothing binary, he said.
Stock markets in Europe and the U.S. have soared to record highs this year, brushing past the impact of ongoing wars in the Middle East and Ukraine and a host of coming elections in which half the world’s adult population will head to the polls.
The ECB on Thursday released its latest Financial Stability Report, which stated that euro area financial stability has improved due to a better economic outlook and falling inflation.
Rising geopolitical risks present “considerable downside risks,” the ECB warned in the report. Risks remain “high” on a historical basis, it added, given factors such as rising debt service costs, signs of banking profits peaking, and the ongoing downturn in commercial real estate.
The report attributes the rally in financial markets to analyst expectations of interest rate cuts from major central banks this year.

“Growing signs of pricing-for-perfection [are] creating the potential for outsized market reactions to disappointments,” the report said.
De Guindos said the ECB did not factor in any concrete outcomes when it comes to the results of the elections, but that overall they posed the possibility of additional fragmentation in the global economy.
The ECB vice-president noted an increase in tariffs and the implementation of protectionist measures from some countries. “This is going to give rise to fragmentation in terms of trade, in terms of growth, and that will reduce the potential growth of the global economy,” he said. “That comes on top of the risk factors from Ukraine and the Middle East.”
An abrupt market correction poses a “potential vulnerability,” De Guindos warned. “That is a risk that we have to take into consideration when looking forward.”
“And that’s the element that you cannot ignore, you cannot overlook this potential impact that could affect risk aversion, risk attraction, commodity prices, growth, overall growth in the global economy.” More