European bond yields fell as U.S.-German spreads widened post US election. Equity markets dropped, the euro weakened, and Brent crude rose on anticipated supply constraints.

European bond yields declined over the week, pushing the spread between 10-year U.S. Treasuries and German Bunds beyond 200 basis points following Trump’s election. Equity markets turned negative, driven by concerns over potential U.S. tariffs on European companies, particularly in the automotive sector. The euro weakened to 1.0718 against the dollar. In commodities, Brent crude prices rose 1.32%, as markets anticipate potential supply constraints from expected Trump administration sanctions on Iran and Venezuela. Additionally, Gulf of Mexico oil production remains disrupted in the wake of Hurricane Rafael.

The Eurozone economy stagnated with weak demand. Manufacturing faced declines and job cuts. Services showed modest growth. Germany's industrial production fell. Recession risks increase.

The Eurozone economy showed stagnation in October, with weak demand and declining new orders, particularly in manufacturing. The Eurozone Composite PMI remained at 50.0, indicating no change from September and signalling weak economic activity. While the services sector saw modest growth, driven by a slight increase in employment, manufacturing continued to struggle, with job cuts reaching the fastest pace since December 2020. Business confidence decreased, deepening a 5-month trend of declining optimism. Germany and France saw an economic contraction, while Spain and Ireland experienced stronger growth. German industrial production fell by 2.5% in September, impacted by declines in construction and exports, narrowing the trade surplus. However, factory orders surged by 4.2%, signalling some resilience. Geopolitical uncertainties, such as potential U.S. tariffs and domestic political instability, add to the challenges. A technical recession is expected for Germany, which could further pressure Eurozone growth in Q4 2024.

The Eurozone economy stagnated in October, with weak demand, declining new orders, and rising employment cuts, particularly in manufacturing, while services showed modest growth.

The Eurozone Composite PMI for October indicates a stagnating economy as the region enters the fourth quarter of 2024, with the PMI at 50.0, showing no change in activity compared to September's 49.6. This marks a two-month high but remains well below the historical average of 52.5. The services sector saw modest growth, rising slightly to 51.6, reflecting the ninth consecutive month of expansion. However, weak demand conditions persisted, leading to a decline in new orders and a sharp drop in employment, particularly within manufacturing. The downturn was most pronounced in Germany and France, where economic activity contracted further, while Spain and Ireland showed stronger growth with PMIs of 55.2 and 52.6, respectively.

The stagnation was driven by ongoing weak demand in both goods and services sectors. New orders in the private sector shrank for the fifth consecutive month, with manufacturing experiencing a sharper decline than services. Employment fell in manufacturing at the fastest rate since December 2020, while services saw only a marginal increase in job creation. Business confidence continued to decline, deepening a five-month trend of reduced optimism. As a result, the economic outlook for the Eurozone remains uncertain, with risks leaning toward a slight contraction in GDP for Q4 2024.

We expect the manufacturing sector to remain the main drag on growth in the Eurozone. Given the prevailing economic conditions, we forecast a moderate slowdown in overall growth in Q4.

German industrial production declined, with drops in construction and exports, narrowing the trade surplus. Despite challenges, factory orders surged, signalling some resilience amidst economic uncertainty.

German industrial production continued its downward trend in September, with output falling by 2.5% MoM, compared to a 2.6% gain in August. Year-over-year, industrial production declined by nearly 5%, driven by contractions across all major sectors. Construction output, which had shown tentative signs of stabilization over the summer, also dropped by more than 1% month-over-month. Notably, this sectoral decline occurred alongside a significant 1.7% drop in German exports in September, following a 1.5% increase in August, while imports rose by 2.1%. As a result, Germany’s trade surplus narrowed sharply from €22.7 billion in August to €17 billion in September. The overall trend suggests that the German industry has not yet reached a period of stability; third-quarter production was still approximately 2% lower than in the second quarter.

Meanwhile, a surprising surge in factory orders has provided some positive signals, with orders climbing by 4.2% in September. This increase significantly outpaced the 1.4% gain predicted by economists and marked a strong reversal from August’s 5.4% decline. The rise was largely driven by big-ticket orders—particularly for aircraft—boosted by increased Airbus orders from its Hamburg facility. Additionally, automotive industry orders, which had been facing pressure due to potential plant closures and job cuts at major players like Volkswagen and Schaeffler, rose by 2.9% MoM. Even when excluding large orders over €50 million, factory orders grew by 2.2%, signalling some underlying resilience in Germany’s industrial sector despite ongoing challenges.

Looking forward, economic and geopolitical factors weigh heavily on Germany’s prospects. A potential U.S. increase in tariffs on European exports, such as automobiles, could further impact the country’s export-driven industries, particularly as 10% of German exports are bound for the U.S. Domestically, political uncertainty has also intensified following recent government turmoil, with possible early elections in March 2025. This development could delay crucial economic policies aimed at stimulating growth, which Germany urgently needs given that its industrial production is still over 10% below pre-pandemic levels.

We now view a technical recession as highly probable this winter, which will exert downward pressure on overall Eurozone growth. Moreover, sustained long-term growth hinges on effective government intervention to enhance competitiveness, reduce regulatory constraints, and invest in critical infrastructure.