European bonds mixed as German yields fell; Germany kept AAA rating; markets declined; euro rose 1.4%; Brent oil jumped 15% after Israel-Iran tensions.

European bond markets had a mixed week, with German and UK yields falling sharply while France, Italy, and Spain experienced slight increases, causing the Franco-German 10-year spread to widen to 72.1 basis points amid broader risk spread expansions. Germany maintained its prestigious AAA credit rating, reaffirmed by S&P with a stable outlook, supported by moderate government debt, a wealthy and resilient economy, and the strongest external balance sheet among major global economies, despite subdued growth and rising deficits. The cost of bankruptcy protection remains low at 9 basis points, well below the US’s 49 basis points. Markets were broadly negative, with Germany, the Euro Stoxx, and Spain leading the declines, while the euro appreciated 1.40% against the US dollar. Meanwhile, Brent crude oil surged 15.15% following Israel’s attacks on Iran, raising concerns about potential supply disruptions in the Middle East.

Eurozone industrial production fell 2.4% in April; geopolitical tensions and energy costs persist. Germany’s inflation remains stable at 2.1%, but core pressures stay elevated.

Eurozone industrial production fell 2.4% MoM due to inventory adjustments, US tariffs, and rising oil prices, though year-on-year growth remained slightly positive at 0.8%. Germany, France, and Spain saw notable declines, while Italy grew modestly and Ireland’s 15% drop skewed data. Geopolitical tensions, including Israel-Iran conflicts, have pushed Brent crude near $80, intensifying energy cost pressures. Supply chain disruptions, inflation, and uneven demand further cloud the outlook, though fiscal stimulus and defence spending offer cautious optimism. Meanwhile, Germany’s inflation held steady at 2.1% in May 2025, supported by falling energy prices, though food, services, and core inflation remain elevated. Consumer prices rose 0.1% monthly, while the harmonised index increased 2.1% annually. Inflation is expected to stay stable but persistently high in core areas.

Eurozone industrial production fell 2.4% in April due to inventory adjustments, US tariffs, and rising oil prices, with uneven recovery amid ongoing geopolitical and economic uncertainties.

In April, Eurozone industrial production unexpectedly declined by 2.4% MoM, partially reversing the robust first-quarter surge fuelled primarily by US front-loading ahead of tariff increases. Despite this contraction, year-on-year production remains slightly positive at 0.8%. However, significant disparities exist across member states: Germany, France, and Spain experienced notable declines, while Italy recorded modest growth, and Ireland’s steep 15% monthly drop heavily distorts the aggregate data. The sector is grappling with two main headwinds—cyclical inventory adjustments after years of elevated stockpiling and the ongoing impact of US tariffs, which had initially driven the strong first-quarter momentum. The outlook has further dimmed due to escalating geopolitical tensions, including Israel’s recent military actions against Iran, which have pushed Brent crude prices back near $80 per barrel, intensifying energy cost pressures on manufacturers. These developments come against a backdrop of volatile global economic conditions, including supply chain disruptions, inflationary pressures, and fluctuating demand. Despite these challenges, recent policy measures, such as Germany’s fiscal stimulus package and increased European defence spending, have bolstered order books and fostered cautious optimism. Additionally, early signs of inventory cycle normalisation, especially in Germany, suggest potential for future production growth as stock levels adjust to more sustainable levels. Nevertheless, the manufacturing sector’s recovery remains fragile and uncertain, as persistent geopolitical risks, rising energy costs, and uneven demand across the Eurozone continue to weigh heavily on prospects for sustained industrial growth.

We expect Eurozone industrial production to gradually recover as inventory cycles normalise and order books improve, but ongoing geopolitical tensions and rising energy costs will continue to pose significant risks.

Germany’s inflation held at 2.1% in May 2025, driven by falling energy costs, rising food and service prices, and persistent core inflation pressures.

In May 2025, Germany’s annual inflation rate remained steady at 2.1%, unchanged from April, with consumer prices rising 0.1% month-on-month. This stability is primarily due to a continued 4.6% year-on-year decline in energy prices, including significant decreases in motor fuels, heating oil, and electricity. Meanwhile, food prices increased by 2.8%, driven by higher costs for fruits, confectionery, fats, and dairy products, outpacing overall inflation. Core inflation, which excludes food and energy, stood at 2.8%, reflecting ongoing underlying price pressures. Service prices rose 3.4%, led by notable increases in passenger transport, insurance, healthcare, and rents. Goods prices also rose by 0.9%, with higher prices for non-alcoholic beverages, tobacco, and motor vehicles, although some sectors such as telecommunications and mobile phones experienced price declines. The harmonised consumer price index confirmed this trend, rising 2.1% year-on-year and 0.2% month-on-month, underscoring a broadly stable yet persistent inflationary environment shaped by mixed sectoral price movements and continued energy cost reductions.

We expect Germany’s inflation to remain stable in the near term, supported by continued energy price moderation, while rising food and service costs may keep core inflation elevated.