European bond prices fell, Treasury yields surged, stock markets declined, the euro strengthened, and Brent crude dropped amid trade tensions and supply disruptions in the U.S.

European bond prices declined over the week, accompanied by sharp fluctuations in the spread between U.S. Treasuries and German bunds, as Treasury yields rose more rapidly than those of German government bonds. Equity markets also fell, with France leading the downturn with a loss of more than 2%. Despite market weakness, the euro appreciated 1.14% against the U.S. dollar. Brent crude oil prices dropped 2.23%, pressured by intensifying trade tensions between the United States and China, including the implementation of additional tariffs. Further downward pressure came from supply-side disruptions, such as issues with the Keystone pipeline and increasing crude oil inventories in the U.S.

Germany's industrial production dropped 1.3% in February, signalling ongoing economic challenges, while inflation eased to 2.2%, driven by falling energy prices and slower service cost growth.

Germany's industrial production fell 1.3% in February, reflecting ongoing structural challenges, including weak construction, food production, and energy sectors. Despite a 1.8% rise in exports, driven by a surge in shipments to the US ahead of anticipated tariffs, industrial output remains 10% below pre-pandemic levels. This weak performance contributes to fears of a third consecutive economic contraction in 2025, with economists warning that the country's reliance on traditional industries without significant innovation could threaten long-term competitiveness. The temporary suspension of US tariffs offers some relief, but the underlying issues persist, with stagnant industrial orders and increasing global competition. Meanwhile, Germany's inflation eased slightly to 2.2% in March, helped by falling energy prices and slower service price growth, though food prices and services continued to push inflation higher. Inflation is expected to remain volatile amid these challenges and external economic shocks.

Germany’s industrial production fell sharply in February, highlighting structural challenges, while export gains offer limited relief amid fears of a third consecutive economic contraction in 2025.

German industrial production fell by 1.3% in February, a sharper-than-expected decline driven by continued weakness in construction, food production, and the energy sector—underscoring the deepening structural challenges facing Europe’s largest economy. These include subdued global demand, the loss of Russian energy supplies, burdensome regulation, and a persistent shortage of skilled labour. Although exports rose 1.8% month-on-month, bolstered by an 8.5% surge in shipments to the United States ahead of anticipated US tariffs—now temporarily suspended for 90 days—this uptick contrasts sharply with the ongoing deterioration in domestic industrial output, which remains 10% below pre-pandemic levels and 4% lower year-on-year. The resulting trade surplus of €17.7 billion in February, up from €16.2 billion in January, offers only limited reprieve, as stagnant industrial orders and intensifying global competition prompt economists to warn that Germany may be headed for a third consecutive year of economic contraction in 2025.

The 90-day suspension of tariffs offers Germany temporary relief, but its economy remains heavily reliant on a traditional industrial model lacking innovation, threatening long-term competitiveness. We expect another year of stagnation.

Germany's inflation eased to 2.2% in March, driven by falling energy prices and slower service cost growth, while food prices and services continued to exert upward pressure.

Germany's inflation eased slightly in March, with the headline rate falling to 2.2% from 2.3% in February, while core inflation, excluding food and energy, dropped from 2.7% to 2.6%. The primary contributors to this moderation were a more significant decline in energy prices, which fell by 2.8% YoY compared to 1.6% in the previous month, alongside a slowdown in the growth of service prices, which increased by 3.5%, down from 3.8% in February. Services, particularly in areas like transportation, social facilities, and insurance, remained a key driver of inflation despite the overall moderation. The drop in energy costs, especially for motor fuels and household energy, was partially offset by rising food prices, which saw a 3.0% increase, and higher costs in areas like clothing and leisure. Despite this easing, inflation is expected to remain volatile, driven by fluctuations in energy prices and potential external economic factors. With a cooling labour market in Germany potentially alleviating some wage-driven inflation, the delayed impact of rising service prices could continue to exert upward pressure. As a result, headline inflation is anticipated to fluctuate between 2.0% and 2.7%. The European Central Bank faces a challenging policy environment, with the possibility of further adjustments to interest rates depending on future disinflationary trends.

We expect that inflation will remain volatile in the coming months, influenced by fluctuating energy prices, ongoing pressures in the service sector, and potential external economic shocks, such as tariffs.