European bond yields rose due to U.S. inflation data, while stocks, led by Germany, surged. The euro strengthened, and oil prices slightly declined amid Ukraine peace hopes.

European bond yields increased over the week, largely driven by stronger-than-expected U.S. inflation data. The stock market continued its positive momentum, with the German market leading the way, rising more than 3%, an unusual performance given the state of the German economy. The euro strengthened against the dollar, closing the week at 1.0491. Brent crude oil prices edged down by 0.07%, pressured by renewed optimism for a peace deal in Ukraine after former President Donald Trump's comments, where he stated that both Russian and Ukrainian leaders had expressed a willingness to engage in negotiations.

Eurozone GDP grew 0.1% in Q4, with weak performance driven by low consumption, high inventories, and weak exports. ECB plans further rate cuts.

Eurozone GDP grew by 0.1% in Q4, slightly better than the initial estimate of zero growth, but still the weakest performance of the year. Germany and France both contracted, while Italy stagnated and Spain experienced strong growth. The region continues to face challenges, including sluggish consumer recovery, high inventories, and economic uncertainty. The export sector is struggling due to weak global demand. In response, the ECB plans further interest rate cuts to stimulate the economy. Meanwhile, industrial production fell 1.1% in December and 2% YoY, driven by reduced demand for capital goods and high energy prices. The outlook remains weak, with no significant rebound expected in production due to external demand challenges and ongoing economic pressures.

Eurozone GDP grew 0.1% in Q4, with weak performance due to low consumption, high inventories, economic uncertainty, and struggling exports. ECB plans further interest rate cuts.

The second reading of Eurozone GDP for Q4 reveals a modest growth of 0.1%, slightly better than the initial estimate of zero growth. However, this remains the region's weakest performance of the year. The two largest economies, Germany and France, both contracted—Germany by 0.2% and France by 0.1%—while Italy stagnated for the second consecutive quarter. In contrast, Spain saw a robust growth of 0.8%. Despite the slight revision upward, the overall outlook remains weak, as productivity issues continue to hinder recovery. Consumer recovery remains sluggish, with purchasing power failing to translate into strong consumption, while investment continues to be constrained by high inventories, economic uncertainty, and elevated interest rates. The export sector is also struggling due to weak external demand. In response, policymakers are intensifying efforts, with the European Central Bank (ECB) expected to further reduce interest rates by 0.25 percentage points, targeting a neutral deposit rate of 2%, potentially lowering it to 1.75%. Meanwhile, employment figures showed a marginal increase, but productivity per worker declined, contributing to higher unit labour costs and underlying price pressures across the region.

The Eurozone is severely affected and the situation could worsen if Trump ultimately imposes tariffs. We believe the ECB should cut interest rates, so we expect a couple of rate cuts this year.

Eurozone industrial production fell 1.1% in December and 2% YoY, driven by declines in capital goods, with weak demand, high energy prices, and uncertainties hindering recovery.

Eurozone industrial production fell more than expected in December, contracting by 1.1% compared to November, continuing the downward trend that began in early 2023. On an annual basis, it dropped by 2% YoY. The decline was driven by reductions in intermediate and capital goods production, while consumer goods and energy production saw increases. Germany and Italy were key contributors to the overall downturn. Although the manufacturing PMI showed a slight improvement in January, the output index still indicated contraction, with export orders declining, albeit at a slower pace. Weak global demand, high energy prices, and tariff uncertainties continue to challenge the sector, making a swift recovery unlikely. While there may be hope for reduced inventories, lower interest rates, and stronger domestic consumption later in the year, a substantial rebound in production is not expected in the coming months.

We don’t expect significant improvements in the sector, with Germany struggling and low external demand, which could further erode competitiveness if Trump imposes tariffs on European products.