European bond yields rise; political tensions, economic concerns, and stock markets fall.

European bond yields experienced an increase over the week, driven by escalating political tensions, particularly in France, and a weakening economic outlook. The yield spread between French and German benchmark bonds has continued to widen in anticipation of the upcoming elections. Stock markets across Europe generally trended downward, with declines observed in most major exchanges. The euro appreciated, reaching 1.0715. Additionally, Brent crude oil prices saw a slight decrease of 0.21%.

Germany's recovery is sluggish with rising unemployment and weak business confidence, while Italy's business confidence drops but consumer confidence improves.

Germany's economic recovery remains sluggish, with the Ifo business climate index falling to 88.6 in June and business outlook declining for the first time since January. Despite strong wage growth and consumer confidence, high inventory levels and weak order books hinder growth. The labour market is also deteriorating, with unemployment rising to 6% in June due to economic factors and cautious hiring, resulting in fewer job vacancies. In contrast, Italian business confidence declined from 88.2 to 86.8 in June, while consumer confidence rose to 98.3 due to new incentives for electric and hybrid vehicle purchases. Despite mixed sector performances, Italy's overall economic recovery continues, though GDP growth is expected to slow slightly in the second quarter.

The latest German confidence indicators reveal a sluggish recovery for the German economy following its cyclical bottoming out at the beginning of the year.

Germany's Ifo business climate index unexpectedly fell to 88.6 in June from 89.3 in May, with the Ifo business outlook declining for the first time since January. This drop, driven by worsening expectations—which decreased from 90.3 to 89—while the current assessment remained unchanged at 88.3, indicates that the anticipated recovery remains elusive.

Optimism from earlier in the year has given way to a more realistic outlook, as recent PMI and Ifo readings underscore ongoing struggles for momentum in the German economy. Despite hopes for an inventory cycle turnaround, inventory levels remain high and order books have weakened. The weakness extends beyond industry, with private consumption failing to emerge as a growth driver despite strong wage growth and improving consumer confidence.

While some momentum is expected over the summer, partly driven by the Eurocup, challenges such as increasing insolvencies, job restructuring announcements, and policy uncertainties will likely impede any significant rebound this year.

We do not anticipate a strong recovery in activity, which is still far off. Economic rebound could begin at the end of the year and continue throughout 2025.

Germany's labour market is deteriorating, with unemployment rising to 6% in June. Despite seasonal trends, economic factors have driven a significant increase in unemployment and a decline in job vacancies.

Germany is facing a decline in its labour market, as the seasonally adjusted unemployment rate unexpectedly increased to 6% in June, up from 5.9% in May. The total number of unemployed individuals reached 2.727 million, an increase of 4k from the previous month, according to the Federal Employment Agency. Despite the unemployment rate remaining unchanged from May at 5.8%, there are 172k more unemployed individuals compared to a year ago.

Typically, unemployment decreases in June due to seasonal factors; however, recent years have seen this pattern disrupted by the COVID-19 pandemic and the flood of Ukrainian war refugees. This year's increase is primarily attributed to economic factors. Companies continue to exercise caution in hiring new staff, leading to a decline in registered job vacancies. The agency reported 701k vacancies in June, 69k fewer than the previous year.

We do not expect significant changes in the unemployment rate, expecting it to remain relatively stable throughout the year. The German economy is currently weak, and we foresee no improvement until the effects of rate cuts begin to materialize.

Italian business confidence declined from 88.2 to 86.8 in June, especially in manufacturing and tourism, while consumer confidence rose from 96.4 to 98.3, driven by optimism and incentives for electric and hybrid vehicle purchases. Slight GDP growth deceleration is anticipated.

Italian business confidence declined from 88.2 to 86.8 in June, impacting nearly all sectors. Manufacturing, in particular, fell to its lowest level since November 2020, driven by decreasing orders and an increased stock of finished goods. The services sector also saw a downturn, especially in tourism, likely due to adverse weather in northern Italy. Conversely, sub-sectors such as transport, storage, and business services experienced gains. Notably, confidence in the construction sector rose despite the expiration of tax incentives and weak housing transaction data, possibly due to ongoing projects under the European Recovery Plan. Overall, these mixed results indicate a slight deceleration in GDP growth for the second quarter.

On the consumer side, confidence surged significantly from 96.4 to 98.3, reaching its highest level since February 2022. Consumers showed increased optimism about the economic situation and less concern about future unemployment, with a marked rise in their willingness to purchase durable goods. This shift is likely influenced by new incentives for electric and hybrid vehicle purchases introduced in early June, suggesting a potential temporary boost in durable goods consumption in the latter half of 2024. Despite the varied performance across sectors, Italy's overall economic recovery continues, though a slight slowdown in GDP growth is expected for the second quarter.

As inflation remains below 2%, we do not expect significant changes in consumer confidence in the near term. On the business front, we project an improvement by the end of the year.