European bond yields fell, equity markets gained, and Brent crude rose, driven by ECB rate cuts and hurricane disruptions.

European bond yields declined last week, driven by the European Central Bank's rate cut on September 12. The yield spread between French and German benchmark bonds tightened by 0.4 basis points. Equity markets experienced broad-based gains, supported by the ECB's monetary easing. The euro remained stable against the US dollar, trading at 1.1076. In the commodities market, Brent crude oil prices increased by nearly 1%, spurred by supply disruptions in the Gulf of Mexico caused by Hurricane Francine.

The ECB cut its deposit rate to 3.5% amid a weak Eurozone economy, with projected 2024 GDP growth of 0.8% and ongoing inflationary concerns. Further cuts are possible.

The European Central Bank (ECB) has reduced its deposit rate by 25 basis points (bp) to 3.5%, with the refinancing rate now at 3.65%. This move reflects concerns over a weakening Eurozone economy, where GDP growth is projected to be 0.8% in 2024, with only gradual improvements in the following years. Inflation is expected to fall to 2.5% in 2024 and hit the ECB’s 2% target by late 2025. Further rate cuts are likely in 2024, though their timing remains uncertain. ECB President Christine Lagarde indicated that additional reductions could be forthcoming, contingent on ongoing inflationary pressures. Despite the rate cut, the ECB's cautious approach signals apprehension about a slow economic recovery. Eurozone industrial production fell by 0.3% in July, maintaining its downward trend and emphasizing a dependency on the service sector, with limited prospects for a manufacturing rebound.

The ECB cut rates by 25bp, with more cuts likely in 2024 due to slowing growth and inflation concerns.

The ECB has cut its deposit interest rate by 25 bp to 3.5%, with the refinancing rate set at 3.65%. This move, expected amid declining inflation, is part of the ECB's revised operational framework, which will further narrow the spread between the deposit and refinancing rates to 15bp. The ECB's latest projections confirm weaker Eurozone growth, with GDP forecasted at 0.8% for 2024, increasing slightly in subsequent years. Inflation is predicted to fall to 2.5% in 2024 and reach the ECB's target of 2% by the end of 2025.

Looking ahead, further rate cuts are anticipated, although the timing remains uncertain. ECB President Christine Lagarde hinted at more reductions, citing persistent inflationary pressures such as German wage negotiations and rising price expectations. However, aggressive rate cuts are unlikely this year, with the ECB taking a cautious, data-driven approach. A weaker Eurozone growth outlook, compounded by a soft landing in the U.S., may trigger more significant cuts in 2024.

Despite today’s reduction, the ECB’s optimism regarding the Eurozone’s recovery may be misplaced, and further monetary easing could be necessary to counteract a slowing economy.

In line with market expectations, we anticipated this rate cut given the economic situation, especially in Germany. However, due to persistent inflationary pressures, we expect only one more cut this year.

Eurozone industrial production fell 0.3% in July, continuing its decline, with weak demand and high input costs, signalling limited GDP growth reliant on the service sector.

Eurozone industrial production continued its downward trajectory in July, with a 0.3% MoM decline, marking a weak start to the third quarter. Forward-looking indicators offer little hope for a significant rebound, raising concerns about slowing GDP growth. Despite Draghi's comprehensive plan to enhance European competitiveness, the ongoing contraction in production, which began in September 2022, persists. July's data reveals decline in capital, intermediate, and durable consumer goods, while non-durable and energy production saw modest gains. The weakness is largely driven by subdued demand, as both domestic and export orders remain weak, while elevated input costs—due to rising labour and transport costs—further strain the sector. With manufacturing surveys continuing to signal contraction, the Eurozone economy remains heavily reliant on the service sector for growth, with GDP expansion likely capped at 0.3% for the foreseeable future.

As we have noted multiple times, we expect the manufacturing sector to be the primary drag on Europe's economic growth in 2024, driven largely by Germany's downturn.