Allianz : What to watch

Allianz Research | 14 June 2024

What to watch: Snap elections in France, the equity risk premium puzzle, the end of the Fed conundrum?

Ludovic Subran

Chief Economist [e-mail]

Jordi Basco Carrera

Lead Investment Strategist

[e-mail]

Ana Boata

Head of Economic Research

[e-mail]

Maxime Darmet

Senior Economist US, France, and UK [e-mail]

Eleonore Herfurth Research assistant [e-mail]

Executive summary

This week, we look at three critical issues:

• Snap elections in France: what does it mean for the economy?President Macron's decision to call for snap elections came as a surprise. The Franco-German10yr spread has now risen by +21.7bps since the start of the week, the biggest weekly jump in the spread since the height of the sovereign debt crisis in late-2011.According to polls, a minority far-rightgovernment currently has the highest probability. We continue to believe that it would be short-lived- if happening at all - and that a technocratic/ Front Républicain and Macron- backed minority government could be coming in before the end of the year to avoid a hung parliament impasse. Under this scenario, we expect the public deficit to remain close to -5%of GDP by 2026 and growth to be unaffected. Markets would buy the dip. What could go wrong? A far-rightgovernment would dent growth by -0.3pp,increase the deficit to -6.5%of GDP by 2026, push OAT spreads at 80 to 100bps, corporate spreads between 110bps higher to 210bps and derail equity markets by -10%.vs pre-electionlevels. This is both a lot and little, thanks to the ECB put when it comes to markets, and the general resilience (resistance) when it comes to the real economy.
• The equity risk premium puzzle.Attractive fixed-income yields are not distracting investors from equity markets despite the expected economic headwinds. While the upward momentum is somewhat justified, the trend defies the conventional wisdom of Equity Risk Premium (ERP) metrics, which suggest investors may be paying an increasingly larger premium - especially in the US, where the ERP currently stands at 0% (compared to 5% in the Eurozone). The continued acceleration of market-based 'perceived ERP' suggests that the equity outperformance may be a self-fulfilling prophecy, reinforcing forward-looking expectations in favour of equities and discouraging investors from rotating into fixed-income positions. Yet, the upcoming policy pivot and its expected effect on the long end of the curve mean that risk-free yields may not be as attractive as they are today for a while.
• Fed: Will the conundrum of easy financial conditions soon be resolved?The Fed now projects only one rate cut this year amid still too hot (though easing) inflation. We expect the Fed to start its rate easing cycle in December and have marginally pushed our end-2025rate forecast to 4%. Although elevated interest rates are pressuring segments of the economy, broad monetary and financial conditions are not as tight as they appear, creating a conundrum for the Fed. We expect liquidity to contract soon as the Fed continues with Quantitative Tightening. Tighter Fed liquidity should start to tighten financial conditions heading into 2025, helping the central bank rein in excessive inflation.

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France snap elections: what does it mean for the economy?

European election results aligned with expectations and confirm the centrist pro-European majority continuity. The centrist pro-Europeanmajority obtained 63% of votes (or 456 seats, 54 more than the minimum required to form a majority). However, the EU Parliament will become one of the most polarized in EU history as the extreme right increased their share of the vote to almost a quarter of the seats, led by ECR (73) and ID (58). The far-rightvote is usually motivated by factors such as purchasing power, immigration, and security. The green transition and the war in Ukraine are the least important worries of the far-rightelectorate, with 5 to 10% of votes, according to Ipsos polls. The most likely coalition would seem to combine the EPP (189 seats), S&D (135 seats) and Renew (79 seats). The Greens (53 seats) could also join, but with strings and conditions attached. With a grand coalition, the EU legislative process on future policy priorities (defense integration, boosting competitiveness) should not be hampered in the next five-yearlegislative term. However, the shift to the right in the EU Parliament is likely to have some impact on the policy debate especially on migration and sustainability priorities.

The big surprise came from France with President Macron calling for snap general elections on 30 June and 7 July. As the far-right Rassemblement National (RN), Marine Le Pen's party, came first with 31.4% of votes. President Macron decided to trigger Article 12 of the Constitution an hour after the results were known, choosing to dissolve the National Assembly and call for snap elections. Macron's party's poor performance (14.6% of votes), the strong rise of anti-Europeanvote, and a difficult parliamentary situation (with repeated attempts at gathering a majority behind a no-confidencevote) must have motivated this radical move. The French will now have very little time to cast their ballot, the first round will be on 30 June (the 21st day following the dissolution) and the second round on July 7, a couple of weeks before the 2024 Olympic Games.

Markets were taken by surprise, rapidly pricing in a higher uncertainty risk premium on the euro, the French government bond yield, and other risky assets. This reflects heightened concerns about fiscal slippage and the potential for a doom loop scenario. This is not an unknown market reaction as political polarization, especially when voters shift towards extreme positions, tends to lead to increased market volatility due to the uncertain outlook for governance. In numbers, the CAC 40 dropped 2.7%, compared to a 1.7% fall for the Euro Stoxx 50. The euro depreciated by -0.9%,and French sovereign spreads widened by +12 bps, compared to +10bps in Italy and +6bps in Spain (numbers as of June 11, 2024). Despite these developments, market expectations for the ECB have remained unchanged, with just over one more rate cut anticipated in 2024. Since then, markets have partially reversed the initial risk-offrotation. However, French assets still retain approximately 50 to 60% of the initial shock on a structural basis.

The polls (though highly uncertain) point to the potential formation of a minority far-right government as projected seats for RN are 235-265.The first polls for this election (Figure 1) project 235-265seats for the RN - short of the absolute majority at 289 seats. Macron's party (and allies) is projected to obtain 125-155seats. LR is projected to win 40-55seats and Front Populaire 115-145.However, higher participation rates, two-rounds,and certainly some left-over"cordon sanitaire", a very French anti-far-rightmovement, make the outcome hard to predict. In addition, domestic political alliances keep blurring the lines between a so-called Front Républicain and parties deemed extreme: (i) on the one hand, half of the conservative right party Les Républicains (LR) is willing to support the Rassemblement National (RN); and (ii) on the other hand, the 'Front Populaire,' managed to gather all left- leaning parties, including the extreme left France Insoumise.

We continue to believe such scenario would be short lived (if happening at all) and a hung parliament reality check would push for the formation of a minority, technocratic, Front Républicain government (our central scenario). A third scenario, less plausible at this stage, is a minority left government. If the far-rightbecomes the first coalition in the National Assembly President Macron would likely appoint Jordan Bardella as Prime Minister, the leader of the RN. However, a RN-ledgovernment would face stiff opposition of the other groups in the National Assembly. They would probably unite to form a no-confidencevote ('motion de censure') and take down the government. Political deadlock would mean, in our view, that opposition parties (the left, the centre and the moderate LR) would agree to appoint a technocratic government/Front Républicain, yet minority government to run current affairs until the 2027 presidential election. This union would have to compromise with both right-leaning

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and left-leaning MPs. Fiscal consolidation efforts and structural reforms would be stalled and not much would be expected on the economic policy front.

Figure 1: Projected National Assembly seats June-July 2024 election out of the total of 578 seats

300			2022		Projected - Low Estimates		Projected - High Estimates
250								265
200
150				155
	145
	249			235
100
	153	125
50	115
				89
			74	55
0						40			1	0	2	11	5	20
NUPES		Renaissance	Les	Rassemblement	Other right-	Others
					Républicains &	National	wing populists
					others

Sources: Harris, Allianz Research

We estimate the GDP and public finances impact of two scenarios: RN minority government, and a technocratic- Front Républicain (still minority government for Macron's party). To do so, we estimate the fiscal impulse, the bond market impact and the equity market impact, with the latter two shocks affecting financial conditions and private agents' confidence. In our pre-electionbaseline, we expected French growth at +1.3% in 2025 and +1.2% in 2026, equity market to rise +10%, and government interest rates to drop below 2.5% by end-2025.The results of the three scenarios are summarized in Figure 3.

The RN's economic platform entails a net fiscal cost (debt-funded) of around 0.7% GDP or EUR18bn (excluding the unwinding of the pension reform and the nationalization of highway) based on more realistic assumptions on revenues. Their pledges include various social spending and tax cuts, such as a cut to the VAT on energy products, new healthcare spending, reductions in production tax income tax and social contributions cuts (see Figure 2). The nationalization of the national highways would entail a very large cost of EUR40-50bnbut has been ruled out by the Party in the next legislature. An unwinding of the pension reform would cost a lot to the public finances, but more the burden would materialize on the medium-term.On the revenue side, the RN plans to fund these measures through the privatization of public broadcasting, reducing the French cash transfer to the EU, savings on state operations, lowering benefits for immigrants or a clamp down on tax & social evasion. New spending and tax cut measures have been evaluated at EUR56bn (in 2022 euros), excluding the cost of unwinding the pension reform and the nationalization of highways, vs around EUR48bn of revenues raised. However, receipts look very challenging. Privatizing public broadcasting would face stiff opposition and likely strong pushback from unions. The clampdown on tax & social evasion also appears ambitious1 and uncertain as well as the savings on immigration2. We would deem EUR38bn of revenue raised as more realistic. In total, we estimate a RN-ledgovernment would deliver around +0.7% of GDP (EUR18bn) of net fiscal easing.

We estimate the GDP and public finances impact of two scenarios: RN minority government, and a technocratic- Front Républicain (still minority government for Macron's party). To do so, we estimate the fiscal impulse, the bond market impact and the equity market impact, with the latter two shocks affecting financial conditions and private agents' confidence. In our pre-electionbaseline, we expected French growth at +1.3% in 2025 and +1.2% in

1They are at the top of estimates.

2Some measures could be challenged by the French constitutional courts.

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2026, equity market to rise +10%, and government interest rates to drop below 2.5% by end-2025. The results of the three scenarios are summarized in Figure 3.

Figure 2: Selected economic measures of Rassemblement national (RN)

Spending

Pension reform: restore full retirement at age 60 with 40 years of service andincrease the minimum pension* Income tax exemption for under 30-yrold Exempt from employer's contributions increases of 10% in salaries below 3 SmicExempt corporate tax for self-employedbelow 30 for first 5 years

Reduction in production tax

Reduction of VAT from 20% to 5.5% on fuel, electricity, gas and heating oil

Nationalize highways*

Urgency plan on medical care

Total

Estimated

amount (EUR)

17bn

3.7bn

10.5bn

<3bn

9.6 bn

10.3bn

40 - 50bn

20bn

114-124 bn

Receipts

Privatize public broadcastingTV/radio

Cut back on NGO funding

Savings on immigration*

Clamp down on tax & social evasion

Savings on local governmentoperating costs

Reduction of EU transfer

Reduction of green subsidies

Total

Estimated

amount (EUR)

4bn

2-4 bn

16bn

15bn

5bn

5bn

5bn

52-54 n

*Probably excluded from the next RN-led government ** e.g. Removal of Universal Healthcare

Sources: Rassemblement national, Institut Montaigne, various, Allianz Research

Figure 3: Macro-economic impact of government scenarios

2024

2025

2026

Pre-election baseline

GDP	Fiscal
growth	deficit

0.9 -5.1

1.3 -4.3

1.2 -3.9

Technocratic-Front Républicain(still minority government for Macron's party)

Public	GDP	Fiscal	Public
debt	growth	deficit	debt

111.7	0.9	-5.1	111.8
112.6	1.3	-4.8	113.2
113.0	1.2	-4.8	114.4

Majority RN government

GDP	Fiscal	Public
growth	deficit	debt

0.8	-5.2	111.7
1.0	-5.8	114.6
1.2	-6.4	117.4

Sources: Oxford Economic, Allianz Research. Note: the majority RN government scenario does not include the cost of nationalization of highways and the unwinding of the pension reform.

Under a technocratic government the growth outlook would barely be affected but the public deficit will remain close to 5% of GDP. Under this scenario, we think that political deadlock would mean a slightly tight fiscal stance to assuage markets (0.2% of GDP per year), compared to our expectation of 0.7% of GDP in 2025 and 0.5% of GDP in 2026 under the Attal government. Structural reforms started under the Attal government (such as the unemployment benefit reform) would be stopped. Interest rates on French bonds would fall slightly below 3%, equity prices rise by 7%. GDP growth would barely change from the pre-electionbaseline. This is because tighter financing conditions would be offset by a less tight fiscal stance. However, public deficits would be barely reduced to only -4.8%of GDP by 2026 (after -5.5%in 2023) against -3.9%of GDP in our pre-electionbaseline.

Under a RN government the French risk premium will surge. It would be France's Salvini moment. GDP growth would drop to +1% in 2025 (-0.3 p.p. relative to pre-election) despite the fiscal expansion. Public deficits would

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rise around -6.4% of GDP by 2026 and the debt-to-GDP ratio would climb above 117%. Historical precedents like Italy's 2018 elections show a realistic benchmark for what could happen if France decides to shift to the far-right.In Italy, the far-rightLega's coalition with the Five Star Movement led to political uncertainty, widening BTP spreads, and a 20% drop in equity markets. Similar market volatility could happen in France if the far-rightgains significant power. While the situation in France is somewhat unique, it bears similarities to Italy in 2018. Drawing from the Italian scenario, if Marine Le Pen's party were to gain structural control of France's national assembly, it is estimated that the resulting "right-wing"shift could cause a +50 basis point widening in 10-yearFrench government bond spreads. This would likely be a reaction to heightened risks of fiscal slippage and increased intra-Europeantensions. Please note the dampening effect of the ECB which should not be underestimated in calming markets down.

Not all fiscal spending boost growth and not all revenue-raising measures hurt growth. We remove the reduction of the EU transfer and the receipts from privatization of public broadcasting TV/radio on the revenue side as these items do not affect economic activity. In total, under a majority RN government, the fiscal expansion would be around 1% of GDP (EUR 27bn). Under this scenario, we would expect interest rates to climb to 3.5% by 2025 and stay above 3% in 2026 as financial markets react negatively to the fiscal costs. Equity prices would drop by 10% by the end of 2024 and remain weak through 2026. Our estimates show that GDP growth would be 1% in 2025 (-0.3

1. lower than projected pre-election) because the growth-boosting effect of the fiscal expansion is more than offset by tighter financing conditions and lower confidence hitting private spending. The public deficits would climb to around 6.4% of GDP by 2026 (EUR 199bn) because of lower growth, higher interest expenses, and higher fiscal spending. The debt-to-GDP ratio would rise above 117% of GDP.

The equity risk premium puzzle

Attractive fixed-income yields are not distracting investors from equity markets. Except for 2022 - when all asset classes suffered stagflation - equity markets have delivered above-averagereturns since 2020. The trend looks set to continue in 2024 despite economic headwinds. Interestingly, this is also the case in a risk-adjustedcontext. Sharpe ratios3 indicate that equities continue to exhibit the highest risk-adjustedreturns among all US liquid asset classes, outperforming their fixed-incomecounterparts (Figure 4 & 5).

Figure 4: US yearly total return performance (in %)

80				Equity					IG Corporates
60				HY Corporates				Government Bonds
40
20
0
-20
-40
2005	2008	2011	2014	2017	2020	2023

Sources: LSEG Datastream, Allianz Research

3 The Sharpe Ratio measures the risk-adjusted return by comparing excess returns to their standard deviation.

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Figure 5: US assets Sharpe ratio (10y rolling - monthly returns)

1.4 Equity

1.2	IG Corporate
HY Corporate
1.0
Government Bonds
0.8
0.6
0.4
0.2
0.0
-0.2
2010	2012	2014	2016	2018	2020	2022	2024

Sources: LSEG Datastream, Allianz Research

The upward momentum is somewhat justified, but the trend defies the conventional wisdom of Equity Risk Premium (ERP) metrics, which suggest investors may be paying an increasingly larger premium, especially in the US. Strong earnings resilience is evident across the board, and thematic trends such as artificial intelligence, reshoring, defence and the climate transition continue to drive upward revisions in earnings and pricing expectations. In the US, the ERP, defined as the difference between the earnings yield (the inverse of the Price- Earnings ratio using 12-monthforward earnings) and the risk-freerate (ten-yeargovernment bond yield), is currently 0%. This suggests that investors in the US are receiving minimal additional returns for equity risk compared to government bonds. In contrast, in the Eurozone, the ERP is around 5%, indicating a higher compensation for risk. This disparity is further highlighted by the high PE ratio in the US (~21x) compared to Europe (~13x), making US equities appear more expensive relative to their government bond and transatlantic counterparts (Figure 6). Other metrics confirm that the current trend is defying conventional wisdom. The renowned Shiller cyclically adjusted PE ratio indicates a US equity risk premium above 1%, a historically tight compensation comparable to the period following the 2000s dot-combubble (Figure 7). In the Eurozone, various metrics suggest that the equity risk premium ranges between 3% and 5%, still offering a compelling argument for equities over government bonds, although not near historical highs (Figure 8).

Figure 6: US and Eurozone Equity Risk Premium (ERP)

Sources: I/B/E/S, LSEG Datastream, Allianz Research

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Figure 7: US (S&P 500) Equity Risk Premium (ERP)

10

8

6

4

2

0 -2 -4

ERP based on CAPE Yield

ERP based on 12m FWD PE

ERP based on DS PE

1995 1998 2001 2004 2007 2010 2013 2016 2019 2022

Sources: I/B/E/S, LSEG Datastream, Allianz Research. Note: CAPE: Shiller Cyclically Adjusted PE ratio, DS represents the LSEG Datastream sourced coincident PE ratio.

Figure 8: Eurozone (Eurostoxx 300) Equity Risk Premium (ERP)

15

10

5

0

-5

-10

2000

ERP based on CAPE Yield

ERP based on 12m FWD PE

ERP based on DS PE

2003 2006 2009 2012 2015 2018 2021 2024

Sources: I/B/E/S, LSEG Datastream, Allianz Research. Note: CAPE: Shiller Cyclically Adjusted PE ratio, DS represents the LSEG Datastream sourced coincident PE ratio.

Ultimately, the market-based ERP suggests that the current equity outperformance may be a significant self- fulfilling prophecy. By focusing on an adaptive metric for the total return of equities versus government bonds, it becomes clear that the perceived equity risk premium continues to accelerate, reaching its highest point in the US and the Eurozone since the dotcom bubble. Assuming this metric is a reliable indicator of forward-lookingexpectations, it is reasonable to argue that, despite equity price dynamics drifting from fundamental valuations, the ongoing outperformance of equities compared to bonds reinforces forward-lookingexpectations in favour of equities. This trend discourages market participants from rotating into fixed-incomepositions as the opportunity cost of shifting amid the recent market rally can be perceived as too high, preventing a fundamental rotation based on fundamental relative attractiveness (Figure 9). In this scenario, despite the unattractive valuation of equities compared to government fixed income, equity markets might still find support due to strong earnings resilience and thematic trends such as artificial intelligence, reshoring, defence and the climate transition. These factors could lead to a fundamentally based increase in the ERP, potentially sustaining the year-to-datepositive equity performance. However, it is worth noting that the upcoming policy pivot and its expected effect on the long end of the curve will mean that risk-freeyields may not be as attractive as they are today for a while.

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Figure 9: Market-based smoothed ERP

12%		US
10%
	Eurozone
8%
6%
4%
2%
0%
-2%
-4%
2000	2003	2006	2009	2012	2015	2018	2021	2024

Sources: LSEG Datastream, E. Barthalon (2014), Allianz Research. Note: The smoothed ERP is derived from a self-updating dynamic exponential smoothing method.

Fed: Will the conundrum of easy financial conditions soon be resolved?

The Fed, in a cautious move, now expects only one rate cut this year amid still too hot (though easing) inflation. As widely expected, the FOMC decided to keep the target range of the Federal funds rate at 5.25-5.5%.The median FOMC projection shows only one 25bp rate cut this year against three expected in March. For the end of 2025, they pushed up their forecast slightly, to 4-4.25%.Despite inflation slipping a bit more than expected in May (at +3.3% over the past 12 months, vs. +3.4% in April), underlying price pressures remain too elevated for the Fed's liking. The May payroll report indicated strong wage growth, with average hourly earnings increasing by +0.4% m/m, or +4.1% y/y (from +3.9%). This is too high for the Fed's liking in the context of a still strong, though easing, labor market. Despite the slight rise in the unemployment rate from 3.9% to 4%, the labor market still looks healthy, with initial jobless claims and the layoff rate remaining at very low levels. The vacancy-to-unemployment(V/U) ratio - an indicator of labor market tightness closely watched by the Fed - was cooling at 1.2 in April (from 1.3) but is still above its pre-pandemiclevel. A simple empirical Phillips curve relating labor market slack to inflation suggests that the V/U ratio needs to fall below one for inflation to settle consistently around 2%.

We now expect the Fed to start its rate easing cycle in December. We have marginally pushed up our end-2025 rate forecast to 4%. We noted in a previous report4 that inflation does not look like normalizing before Q4-2024.By cutting interest rates in September, the Fed risks moving too early amid still loose financial conditions (see below). Besides, a September rate cut, in an environment of still elevated GDP growth and inflation above 2%, could backfire on the Fed if it gets politicized ahead of the November election. Candidate Trump has repeatedly accused the Fed of preparing a rate cut to boost Biden's re-electionprospects before the election.

Elevated interest rates are affecting some segments of the economy … Segments sensitive to interest rates are undoubtedly suffering from elevated funding rates. For instance, in the residential market, existing home sales remain rock bottom while new construction has stalled since the beginning of 2024. Low-incomehouseholds also feel the pinch of high interest rates on consumer credit. The delinquency rate on consumer loans reached 2.7% in Q1 2024, the highest since early 2012.

• but broad monetary and financial conditions are not as tight as they appear, creating a conundrum for the Fed. The monetary base (an indicator of liquidity that consists of the currency in circulation plus banks' deposits held at the Fed) is almost 70% above its end-2019 pre-pandemiclevel, or 43% in inflation-adjustedterms. It has even accelerated since early 2023, partly because of the injection of fresh liquidity by the Fed into the banking system in

4What to watch I May 16, 2024 (allianz.com)

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March-April 2023 during the regional banking crisis. As a result, lending standards from the financial sector to private agents are not as tight as often assumed. While the SLOOS survey on banks' lending standards still shows many banks tightening credit supply, the NFIB survey indicates that the number of SMEs reporting tighter loan standards has not increased so much. This is because lending from non-bank financial institutions has stepped up. Additionally, households are still flush with liquid assets5, equivalent to over 88% of their disposable income, against 75-78% in the five years before the pandemic (Figure 10). This still leaves room for households to continue to spend by digging further into their pockets.

Figure 10: Households' cash, deposits and money market shares (% income)

105 Households cash, deposits and money market shares (% income)

95

85

75

65

55

20	20	20	20	20	20	20	20	20	20	20	20	20
00	02	04	06	08	10	12	14	16	18	20	22	24

Sources: LSEG Datastream, Allianz Research

We expect liquidity to start contracting as soon as the Fed continues with Quantitative Tightening (QT). The Fed began downsizing its bloated balance sheet in mid-2022by reducing its Treasury and mortgage-backedsecurities holdings. Usually, there is a close connection between the Fed's securities holdings and monetary base growth (Figure 11). However, this time, the expected result has been delayed because of the 2023 injection of liquidity by the Fed and technical reasons linked to the rapid outflows from the reverse repo facility6. With the normalization of the reserve repo facility, the run-downof the Fed's asset holdings will soon start to exert downward pressure on bank reserves and the monetary base, which should start dropping in early Q4 2024.

Figure 11: Monetary base & Fed' securities holdings

90 Monetary base

70 Fed' securities holdings

50

30

10

-10

-30

2012

2014

2016

2018

2020

2022

2024

Sources: LSEG Datastream, Allianz Research

1. Cash, deposits and money market shares.
2. Money market funds have withdrawn liquidity from the facility to soak up the new bond issuances of US Treasuries in the place of banks. Hence, banks' reserves at the Fed have not decreased (quite the opposite), pushing up the monetary base.

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Tighter Fed liquidity should start to tighten financial conditions heading into 2025, helping the central bank rein in excessive inflation. The growth of the monetary base moves in tandem with our in-housefinancial condition index7, with the former leading the latter by around two quarters (Figure 12). This suggests that the drop of the monetary base in early Q4 2024 that we forecast should start to tighten financial conditions by early/mid 2025. This is probably what the Fed is striving for as it seeks to moderate economic growth and inflation.

Figure 12: Monetary base & financial conditions index

60

Monetary base (% y/y), 2

6

quarters lead

40

Financial conditions index (p.p

4

of annual GDP) - rhs

20

2

0

0

-20

-2

-40

Q1 2018

-4

Q1 2016

Q3 2016

Q1 2017

Q3 2017

Q3 2018

Q1 2019

Q3 2019

Q1 2020

Q3 2020

Q1 2021

Q3 2021

Q1 2022

Q3 2022

Q1 2023

Q3 2023

Q1 2024

Q3 2024

Sources: LSEG Datastream, Allianz Research

7 Our FCI encompasses corporate bond yields, the stock market index and house prices (all in real terms).

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