European bond yields fell, with France facing government instability. Equity markets were mixed, the euro strengthened, and Brent crude fell 4.24% amid easing supply concerns.

European bond yields declined this week, with investors closely watching France due to government instability, a rising deficit, and weakening economic data. The gap between 10-year yields in France and Germany is at its widest since 2012, and French bonds now offer higher yields than Spanish bonds. Many investors noted that "French bonds can be avoided, as Spain’s fundamentals seem strong," adding, "Apart from Germany, they’ll focus on Spanish and Italian bonds." Equity markets were mixed, with most indices down. Germany saw a 1.50% gain, while France posted a 1.29% loss. French stocks are on track for their worst relative performance since 2010 due to a budget deadlock threatening the government. The euro strengthened to 1.0579 against the U.S. dollar. In commodities, Brent crude oil prices dropped by 4.24%, driven by easing supply concerns from the Israel-Hezbollah conflict and expectations of higher supply in 2025, though OPEC+ is expected to extend production cuts.

Eurozone inflation rose to 2.3%, driven by services, while Germany faces economic challenges and rising inflation pressures.

Eurozone inflation rose to 2.3% in November, driven by services, with core inflation steady at 2.7%. Services inflation grew by 3.9%, while food prices increased by 2.8%, and energy costs fell by 1.9%. Despite some inflationary pressures in December, weak demand and moderating wage growth are expected to soften inflation next year. A weakening euro also adds to inflationary pressures. In Germany, the Ifo index dropped, signalling economic challenges and concerns of a winter recession. Consumer confidence in Germany also plunged due to fears of job losses, recession, and political instability. German inflation rose to 2.2%, strengthening opposition to a 50bp ECB rate cut. Core inflation reached a 6-month high of 3%. Inflation is expected to remain moderate, driven by rising service and energy costs, but the weak economy may limit significant price growth.

Eurozone inflation rose to 2.3% in November, driven by services. Weak demand is expected to soften inflation next year, with moderating wage growth and lower services inflation supporting this trend.

Eurozone inflation increased to 2.3% in November, with core inflation remaining stable at 2.7%. Services continued to drive headline inflation, rising by 3.9% (down from 4%), followed by a 2.8% increase in food, alcohol, and tobacco prices, a 0.7% rise in other goods, and a 1.9% drop in energy costs. While some upward price pressures may persist into December, weak demand in the Eurozone is expected to lead to softer inflation next year. November’s data was influenced by base effects and rising commodity prices, particularly in food and natural gas, although their impact on headline inflation has been modest. Additionally, the euro's weakening against the dollar is contributing to inflationary pressures. Despite stronger-than-expected wage growth in Q3, signs of economic weakness and a softening labour market suggest that wage growth will moderate in the coming months. While inflation may remain elevated in December, moderation is expected early next year, with core inflation likely easing, driven mainly by a reduction in services inflation, which fell slightly to 3.9%, while goods inflation edged up to 0.7%. Continued weak demand should support a downward trend in core inflation.

We anticipate inflationary spikes driven by rising services and energy prices; however, the overall trend is expected to be downward due to the prevailing economic weakness.

The German Ifo index dropped in November, reflecting weak economic conditions, global risks, and policy inaction, heightening concerns about a looming winter recession.

The German Ifo index fell in November, dropping to 85.7 from 86.5 in October, signalling continued challenges for the German economy and heightening concerns of a winter recession. The decline was primarily driven by a sharper drop in the current assessment component (84.3, down from 85.7) compared to the expectations component (87.2, slightly down from 87.3). This reflects the impact of negative headlines, corporate restructuring, the war in Ukraine, weak industrial order books, and subdued consumption. Compounding these pressures, risks from the U.S. elections, potential trade policies under a new Trump administration, and competitive disadvantages due to U.S. tax cuts and deregulation could further undermine German exports, particularly in the automotive sector, and shift investments away from Germany. As policymakers remain focused on the upcoming elections, proactive measures to boost defence spending, stimulate investments, or foster new growth sectors appear lacking. The Ifo index underscores persistent stagnation in the economy, reinforcing the likelihood of a technical recession following modest third-quarter growth.

We expect Germany's economy to remain under significant pressure, far from recovery. While the Christmas season may provide modest relief, structural challenges are likely to persist at least until mid-2025.

Germany's consumer confidence drops sharply due to job losses, recession fears, political instability, and potential trade disruptions.

Germany is grappling with a sharp decline in consumer confidence, reflecting heightened concerns about job losses and fears of an impending recession. The GfK Consumer Climate Index plummeted by 4.9 points to -23.3, a forecast for December far worse than the expected -19, signalling weakening consumer sentiment. Economic uncertainty, including job cuts in the car industry, has pushed consumer expectations to their lowest level in seven months, with private consumption—the key driver of Germany’s GDP—set to stall as consumers prepare to tighten their belts. Additionally, the collapse of the country’s governing coalition in November over public borrowing disputes, coupled with the economic uncertainty posed by President-elect Donald Trump’s potential tariffs on imports, adds to the grim outlook. The GfK survey revealed a sharp decline in income expectations and a slight dip in purchasing willingness, while saving intentions have risen, further dampening consumer spending for the final month of the year.

Germany is enduring significant economic challenges, with major companies feeling the strain. Bosch, a key employer, plans to cut 5,000 jobs as the automotive sector faces a crisis, while 10,000 more workers will see reduced hours. Similarly, Thyssenkrupp has warned of up to 11,000 job cuts by 2030. This grim outlook suggests a difficult winter ahead for Europe’s economic powerhouse, with distant recovery.

We anticipate a further decline in consumer confidence, as Germany faces a challenging economic outlook.

German inflation rose to 2.2% YoY in November, strengthening opposition to a 50bp ECB rate cut, with core inflation hitting a six-month high of 3%.

German inflation accelerated in November, rising to 2.2% YoY from 2.0% in October, reinforcing opposition to a 50bp rate cut at the ECB's upcoming December meeting. This marks a notable shift from September’s 1.6% YoY, highlighting persistent inflationary pressures. In terms of components, services inflation remained unchanged at 4%, while the cost of goods decreased to 1.8% from 2.3% MoM. Energy prices fell at a slower pace (-3.7% vs. -5.5% MoM) due to base effects. Core inflation, which excludes volatile food and energy prices, reached a 6-month high of 3% in November, indicating ongoing price pressures. Despite a stabilization in Eurozone economic sentiment, the rise in German inflation strengthens the case against a 50bp rate cut in December. Inflation is expected to remain within the 2% to 2.5% range through 2025, driven by wage growth and the diminishing impact of favourable energy base effects. While the majority of ECB officials support continuing the rate-cutting cycle, there are differing views on the extent of the cuts, with some advocating for a gradual reduction towards a terminal rate of 2% to 3%, while others, including Philip Lane, suggest that rates could fall below neutral. The ECB is clearly focused on returning interest rates to neutral as swiftly as possible to avoid the need for unconventional monetary policies, such as quantitative easing, in the future.

We anticipate modest rebounds in inflation over the coming months, driven by rising costs in services, housing, energy and labour (due to wage increases in certain sectors). However, we do not expect significant spikes, particularly in Germany, where the economy remains relatively weak and may limit the extent of price growth.