European bond yields rose, stock markets performed well except the UK, the euro weakened, and Brent crude oil prices increased due to geopolitical tensions and weak demand.

European bond yields rose across the board, with the long end of the curve, as usual, particularly sensitive to global and US developments. With factors like the US election, escalating Middle East tensions, the hurricane, and concerns about Chinese growth on the horizon, further flattening of the yield curve is likely. Stock markets performed well overall, except in the UK, which experienced a decline. This positive trend came after a week of disappointing industrial data from Germany and increasing concerns from the ECB about slowing economic growth. The euro remained under pressure, trading at 1.09355 against the dollar. In the commodities market, Brent crude oil prices climbed 0.83%, driven by rising geopolitical tensions, increased inventories, and weak demand expectations.

The September ECB minutes highlight concerns over weak growth. Germany’s inflation decreased to 1.6%, while industrial production showed a 2.9% rebound.

ECB minutes reveal increasing worries about sluggish economic growth and ongoing inflation, prompting discussions on a potential rate cut in October. The outlook has shifted due to weak sentiment indicators and a drop in headline inflation to 1.8% YoY. Although the ECB prefers a gradual strategy, some members advocate for immediate cuts in light of volatile oil prices and persistent core inflation in services. In Germany, inflation remained steady at 1.6%, primarily due to a 7.6% decrease in energy costs, despite a slight uptick in food prices. However, a 2.9% increase in industrial production in August failed to alleviate recession concerns in Europe’s largest economy, as factory orders fell by 5.8%, highlighting ongoing structural challenges. The outlook for Germany and the Eurozone appears weak, with limited prospects for a near-term recovery.

The ECB minutes reveal rising growth concerns, persistent inflation, and debate over a potential October rate cut amid weak sentiment indicators and volatile oil prices.

The minutes from the ECB September meeting reveal deepening concerns about weaker-than-expected economic growth, while inflation remains a persistent challenge. Released unusually close to the October meeting due to summer scheduling changes, these minutes illustrate how quickly the ECB’s outlook can shift. At the September meeting, the ECB leaned toward a gradual reduction in monetary policy restrictiveness, with officials preferring to wait until December for a rate cut when updated macroeconomic projections would be available. However, the minutes also note that recent data has led to a downward revision of the growth outlook, while core inflation—particularly in services—remains stubbornly high, moving sideways since November last year.

Since the September meeting, soft sentiment indicators and a drop in headline inflation to 1.8% YoY in September have reignited discussions of a potential rate cut at the October meeting. Some ECB members are now pushing for an immediate cut, although hard macroeconomic data is still lacking. The September inflation figure, while lower, aligns with the ECB’s projections, but remains highly dependent on volatile factors like oil prices, which have risen due to geopolitical tensions in the Middle East. With services inflation still elevated and growth momentum weakening, the ECB faces a tough decision. A rate cut next week would mark a significant shift, potentially signalling a move toward a more responsive, meeting-by-meeting approach to monetary policy, aimed at bolstering growth without ignoring inflation risks.

While the economic outlook has weakened more than expected, both we and the ECB continue to believe that a recession is not the most likely outcome. We expect consecutive rate cuts of 25 basis points in October, November, and December, resulting in a total reduction of 75 basis points over the next three months.

Germany's August industrial production rebound (+2.9% MoM) fails to ease recession fears, as factory orders fell -5.8% MoM, highlighting ongoing structural and cyclical challenges.

The recent rebound in German industrial production, with a 2.9% MoM increase in August following a -2.9% MoM decline in July, has not been sufficient to alleviate recession concerns, as annual output remains nearly 3% below last year’s levels. This uptick, driven mainly by the volatile automotive sector and a modest rise in investment goods, reflects more of a technical rebound than a genuine recovery. The German economy continues to face cyclical and structural challenges, with industrial output still 10% below pre-pandemic levels, and capacity utilisation at lows comparable to those seen during the financial crisis. Additional pressures include policy uncertainty, geopolitical tensions, and a weaker global economy. The labour market, once a stronghold, is under strain due to rising insolvencies and job restructuring announcements. Meanwhile, the recent sharp decline in factory orders by -5.8% MoM—the biggest decline since January—highlights the risk of stagnation, with minimal signs of a near-term recovery. Without structural reforms, fiscal stimulus, or a boost from external demand, Germany is set to remain the eurozone's growth laggard through 2024.

We do not foresee a short-term recovery and continue to believe that it, along with France, will remain a significant drag on eurozone growth in 2024.