European bond yields fell amid political uncertainty and economic concerns, while stock markets rose. The euro appreciated, and Brent crude prices dropped nearly 2% due to a Gaza ceasefire and rate cuts.

European bond yields declined throughout the week due to political uncertainty and a worsening economic outlook, potentially prompting the ECB to cut interest rates again. The yield spread between French and German benchmark bonds widened by 2 basis points over the week. Despite weakening economic data, stock markets across Europe trended higher, reflecting the paradox where negative economic indicators can benefit markets. The euro appreciated to 1.0907. Brent crude prices dropped by nearly 2%, influenced by the possibility of a ceasefire in Gaza and potential rate cuts, which could stimulate demand.

Germany's inflation eased to 2.2% with stable food prices. Italian industry saw modest growth. UK economy surpassed forecasts.

Germany's CPI inflation eased to 2.2%, influenced by lower energy costs and stable food prices, while core inflation remained at 2.9%. Despite these positive adjustments, persistent high interest rates are anticipated to postpone Germany's economic recovery until late 2024 or early 2025. Italian industrial production saw a slight 0.5% uptick in May but remains weak, with ongoing challenges indicated by low business confidence and a sector struggling to return to pre-Covid levels. Meanwhile, the UK experienced stronger-than-expected economic growth, driven by robust services performance and modest gains in industry and construction, suggesting potential future interest rate deliberations by the Bank of England.

Germany's CPI inflation eased to 2.2% in June, driven by lower energy and stable food prices. Core inflation remained at 2.9%. Recovery prospects are hindered by persistent high interest rates, delaying an economic recovery until late 2024 or early 2025.

Germany's CPI reported a YoY inflation rate of 2.2% in June, showing a slight decrease from May's 2.4%. The moderation in headline inflation was supported by lower energy and food prices, while service costs saw above-average increases, maintaining a 3.9% rate for another consecutive month. Energy prices notably declined by 2.1% compared to June 2023, whereas food prices increased by 1.1%, driven by higher costs of fats, oils, sugars, fruits, and cereals. Excluding energy, inflation stood at 2.7%, and core inflation, which excludes food and energy prices, was recorded at 2.9%. This marks the first instance since February 2022, amidst Russia's invasion of Ukraine, that the underlying inflation in Germany has fallen below the 3% threshold.

While these developments may support economic recovery, persistent high interest rates continue to impact Europe's leading economy, and we do not expect a recovery until late 2024 or early 2025.

Italian industrial production rebounded by 0.5% in May but remains weak, with no significant improvement expected through summer. Business confidence remains low, indicating continued industrial challenges.

Italian industrial production saw a modest rebound, increasing by 0.5% from the previous month but remaining 5.7% below pre-Covid levels. The uptick primarily affected consumer goods, intermediate goods, and energy, while investment goods declined. This improvement aligns with forecasts and suggests that the industrial sector's soft patch persists, with business confidence data indicating no significant turnaround through the summer. June surveys revealed further declines in production and order books sub-indices, reaching their lowest levels since December 2020, though a slight reduction in inventories hints at potential future restocking. Despite a possible mild gain in June, the second quarter will likely mark the fifth consecutive quarterly contraction in industrial production. This indicates that the sector will not contribute to growth, with GDP expected to rise by only 0.2%, driven mainly by services.

We anticipate that the industrial sector will continue to drag on economic growth in Europe over the next two quarters. We expect a recovery in the last quarter and into 2025 as the impact of policy measures takes effect.

The British economy grew, surpassing forecasts, with strong services growth and modest gains in industry and construction.

The British economy experienced a 0.4% growth in the past month, exceeding the projected 0.2% increase and recovering from April's stagnation. The real GDP expanded by 0.9% in the three months leading up to May, marking the most robust three-month growth since January 2022. The services sector, a critical component of the British economy, continued its growth with a 0.3% increase in May. Meanwhile, the industrial and construction sectors saw modest gains of 0.2% and 1.9%, respectively, despite facing some challenges. These encouraging economic indicators bode well for the new British government and may fuel speculation from the Bank of England regarding potential interest rate cuts in August.

We believe that the Bank of England will refrain from cutting rates in August, opting instead to review additional economic data before making a decision. We anticipate that any rate cuts will be postponed until September.