European bond yields fell after initial rises. Stocks gained, led by the UK and Portugal. The euro appreciated. Brent crude surged 4.04% on supply concerns.

European bond yields declined over the week, influenced by US inflation data, mirroring trends in US bonds. On Monday, November 13, German 10-year yields initially rose amid a global bond selloff, reaching 2.63%, their highest since June 2024, before ending the week lower. Stock markets closed higher, with the UK and Portugal leading the gains. The euro appreciated slightly against the dollar, closing at 1.0272. Brent crude oil prices surged 1.18%, driven by a significant draw in US crude stockpiles and potential supply disruptions from new US sanctions on Russia, though gains were tempered by a Gaza ceasefire agreement.

Eurozone inflation rose to 2.4% in December 2024, driven by energy and services. Industrial production grew modestly, while Germany faced economic contraction for two consecutive years.

Eurozone inflation reached 2.4% in December 2024, driven by rising energy and services costs. Core inflation stayed at 2.7%, while energy prices rose slightly after prior declines, fuelled by a 50% surge in natural gas prices. Services inflation increased to 4.0% due to wage growth, while unprocessed food inflation rose to 1.6%. The ECB's December meeting emphasized easing financial conditions amid weak growth, maintaining a 3.0% deposit rate while planning further rate cuts to counter inflation undershooting. Industrial production grew modestly by 0.2% in November, but global demand and high inventories weigh on recovery prospects. Germany's economy contracted for a second consecutive year in 2024, marking structural weaknesses in its industrial sector and facing geopolitical risks. While modest Eurozone inflation and industrial improvements are anticipated, sustained economic recovery remains uncertain.

Eurozone inflation rose to 2.4% in December 2024, driven by energy and services costs.

Eurozone inflation continued its upward trend in December 2024, with headline inflation reaching 2.4%, up from 2.2% in November, marking the third consecutive monthly increase. Core inflation, excluding energy, food, alcohol, and tobacco, remained steady at 2.7%. Energy prices shifted from a YoY decline of 6.1% in September to a slight increase of 0.1% in December, driven by a surge in natural gas prices, which rose over 50% compared to the previous year, and a stabilization in oil prices. Inflation for unprocessed food climbed to 1.6%, fuelled by rising agricultural commodity prices after a significant decline earlier in 2024. Goods inflation remained muted at 0.5%, while services inflation increased to 4.0% from 3.9% in November, reflecting persistent wage growth and pricing power in the service sector. Although the ECB anticipates headline inflation will ease to 2.3% in early 2025 due to declining energy costs, current data raises questions about the accuracy of this forecast. The ECB’s Governing Council appears committed to a gradual easing strategy but remains cautious about underestimating supply-driven inflation shocks, leaving critics increasingly sceptical of the institution's responsiveness to evolving inflation dynamics.

Inflation disparities among Eurozone member states were notable in December 2024. Slovakia reported the highest annual inflation rate at 3.2%, followed by Germany at 2.8% and Austria at 2.1%. Meanwhile, Ireland recorded the lowest rate at 1.0%, with Italy at 1.4% and Luxembourg at 1.6%. These variations highlight differing local factors, including energy dependence, labour market dynamics, and consumption patterns, posing challenges to a uniform inflation management strategy within the monetary union.

We anticipate that the ECB will continue its rate-cutting cycle, albeit at a more moderate pace than market expectations suggest. While inflation in the Eurozone may experience minor rebounds in the short term, the overall trend is expected to show a gradual decline, reflecting the easing of upward pressures from energy prices and a potential slowdown in wage growth later in the year.

The ECB’s December minutes reveal a strong easing bias, emphasizing further rate cuts amid weak growth, inflation risks, and restrictive financial conditions, with 3% deposit rates.

The minutes of the ECB’s December meeting confirm a strong easing bias, driven by concerns over the Eurozone’s economic outlook and the risk of inflation undershooting. The debate focused on the size of the rate cut, with some members advocating for a 50bp reduction instead of the eventual 25bp cut, reflecting growing concerns over the deterioration in economic conditions. Staff projections indicated that stabilizing inflation near the target would require further rate cuts and easing of financing conditions. Inflation undershooting was mentioned three times, highlighting its prominence in discussions, while GDP growth projections, revised downward, were deemed overly optimistic due to assumptions about unchanged trade policies and stronger foreign demand. At 3.0%, the deposit interest rate remains restrictive, exacerbating the weak economic environment. With bond yields surging and financial conditions tightening, the ECB is likely to implement additional cuts to mitigate downside risks. As inflation trends suggest temporary pressures, the focus remains on a sustainable return to neutral rates, with the next meeting in two weeks potentially addressing further reductions.

Eurozone industrial production rose 0.2% in November, but ongoing challenges, including weak global demand, high inventories, and rising energy prices, keep the outlook weak for 2025.

Eurozone industrial production saw a modest increase of 0.2% in November, following a similar rise of 0.2% in October. However, this marginal growth fails to counter the two-year downward trend, leaving the industrial outlook weak as the year begins. While production rose in several major economies, including Germany, which posted a 1.3% MoM increase, Ireland's substantial 5.8% decline and broader weak global demand continue to drag on the sector. The recently released GDP figures for Germany show a contraction of 0.3% in Q4 2024, and the overall stagnation expected for the Eurozone suggests that industrial production is unlikely to positively contribute to GDP growth. Despite some individual country improvements, the broader industrial sector faces ongoing challenges, including historically high inventory levels, stagnant new orders, and the adverse effects of rising energy prices, making a sustained recovery uncertain.

We expect industrial production to remain under pressure, potentially impacted by Trump's policies. It's too early to predict when recovery may begin.

Germany's economy contracted for two consecutive years, with weak industrial performance, rising energy costs, and global geopolitical tensions affecting growth.

Germany's economy experienced its second consecutive year of contraction in 2024, with GDP declining by 0.2%, following a 0.3% decrease in 2023. This marks the first time since 1950 that the economy has experienced consecutive annual contractions, reflecting a combination of cyclical and structural challenges that have intensified over time. Key contributing factors include persistent underinvestment, a loss of global competitiveness, and the shift of China from a major export market to a direct industrial competitor. These dynamics have been particularly detrimental to the industrial sector, with manufacturing output still 10% below pre-pandemic levels and industrial capacity utilization at levels comparable only to those seen during the financial crisis. While Germany's industrial troubles have spilt over to other sectors, the broader economic outlook remains weak. Some banks project modest growth of 0.2% in 2025, though risks of further contraction persist, especially if US President-elect Trump’s proposed tariffs are enacted. Rising energy costs and weak manufacturing underscore deeper structural weaknesses within the German economy.

Germany is stagnating in a traditional economic model, where insufficient investment in competitiveness is now taking its toll. We believe the economy will experience modest growth in 2025.