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Implications of Middle East escalation
- Macro economy
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The military escalation in the Middle East threatens the economy because of the disruption to energy supplies and increased uncertainty. Energy infrastructure has not yet been significantly impacted, but that remains a risk as air strikes continue to rage. Shipping through the Strait of Hormuz - one of the world's most important energy choke points - has come to a near stand-still. Any sustained energy price shock would have more noticeable effects on inflation than growth. We present inflation scenarios assuming oil at USD 80 per barrel, 100 and 130; in all cases inflation spikes in 2026 but falls back in 2027 . For monetary policy, the duration of the shock is crucial, as are second round effects, given the focus on the medium term.
Global Monthly - Geopolitics bad, macro good
- Macro economy
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While the risks have certainly not gone away, economic data has been generally firming, while near term positive impulses are getting stronger. Higher AI capex spending looks to be bigger than expected, fiscal stimulus is ramping up and financial conditions remain easy. So far geopolitics has been the dog, which barks very loudly, but does not bite. That cannot be taken for granted with Iran the latest flashpoint. SCOTUS decision to scrap IEEPA tariffs may not change too much, not least because fresh tariffs have largely replaced the old ones. There is an increasing chance that the global economy may run hot in the near term but also of a future hangover further down the line.
The changing of the guard at the ECB
- Macro economy
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The Financial Times reported this morning that ECB President Christine Lagarde will leave her post before her term expires in October 2027. The reported reason is that she wants to exit before the French presidential election in April of next year, which would allow French President Macron - together with German Chancellor Merz - to be in the driver’s seat when it comes to selecting a new ECB President. The ECB did not fully deny the story, but responded by saying that Lagarde had ‘not taken any decision’.
Kevin Warsh’s Reverse Operation Twist
- Macro economy
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The Trump administration would like to see long-term interest going down yet oddly Warsh’s vision of the Fed appears to imply the opposite. There is a trinity of steepening policies, though in this note we focus on his policy to rein in the footprint of the central bank’s balance sheet. Shrinking the balance sheet would need the Fed to go back to a scarce reserves policy, which would make it more difficult to set interest rates. More likely is for it to reduce the skew of its Treasury holdings towards longer-term securities to market-neutral in a Reverse Operation Twist. The Fed’s Operation Twist in 2011-2012 flattened the curve and lowered the term premium and this would likely have the opposite impact. The US Treasury could alter its issuance policy, in effect conducting its own Operation Twist as part of a 2026 Fed-Treasury accord. The rising funding needs of the US government could still make these shifts challenging, meaning they are more likely to be gradual.
Euro not yet an issue for the ECB
- Macro economy
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The ECB has been saying for months that interest rates are in a good place, and today it repeated this message following its Governing Council meeting.
Spotlight - Geopolitical risk is back with a vengeance
- Macro economy
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Geopolitical risks have flared up in a dramatic fashion at the start of the year. We present a framework to analyse the main channels of impact for the economy. The Greenland dispute risks escalating economic warfare between the EU and the US and an undermining of NATO, while the risks surrounding Iran revolve around oil supply. Threats to Fed independence could destabilise inflation expectations, but Chair Powell remains defiant.
Global Monthly - Orange is the new Green
- Macro economy
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Geopolitical risk is increasingly dominating the outlook. The US-EU dispute over Greenland threatens a new tariff war – or worse. Over the next month, we will see just how far Trump is prepared to go to obtain Greenland, and whether Europe can stand its ground. We refrain from changing our base case given the fluidity of events, but uncertainty is clearly back with a vengeance, and the outlook less benign. Spotlight: We present a framework to analyse the main channels through which geopolitical risk impacts the economy.
The economic fall-out from Trump’s Greenland ambitions
- Macro economy
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President Trump has strongly re-stated his view that acquiring Greenland is a national security priority of the United States. The White House has said it is exploring options to do so and that ‘utilising the US military is always an option’. This comes against the background of the capture of Venezuelan President Maduro over the weekend. This was seen as a demonstration that the Trump administration is willing to use military power to achieve its objectives and that international law is not at the forefront of its considerations. Various other Latin American countries appear to be at risk of a similar fate, but there have also been renewed threats in the direction of Greenland. Greenland is an autonomous territory of Denmark, which is a member of both the EU and Nato. In this note, we set out the current state of play, possible scenarios and the implications for the European economy in a Q&A format.
Steady ECB rates as far as the eye can see
- Macro economy
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The ECB kept its key policy rates on hold as expected at the December Governing Council meeting. In the press conference following the decision, President Christine Lagarde repeated that the ECB was in a ‘good place’ with regards to interest rates, but also that this does not mean that the policy would be ‘static’. Indeed, the Council continued to signal that it would ‘follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance’. However, with economic growth revised up in the projections and inflation (especially stripping out energy prices) broadly seen on target, a rate change in either direction does not seem on the cards anytime soon, absent of a new shock. Indeed, we expect the ECB to keep its deposit rate at 2% in the coming months.
Special Global Outlook 2026 - We need to talk about Exorbitant Privilege
- Macro economy
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Exorbitant Privilege: The erosion of US institutions has surprised in its speed and scope. What are the risks in 2026, and can Europe step up to fill some of the void?
