EU Economy: Weekly Commentary – 20 May, 2024
European Market Review
European bond yields fell in anticipation of June rate cuts. Stock markets saw gains with Spain and Italy outperforming. EUR strengthened against USD, while Brent crude surged on improved economic indicators.

European bond yields declined, influenced by both inflation data and expectations of rate cuts in June. Spain and Italy equity markets, with low valuations, share buybacks, and high dividends saw gains. EUR strengthened to 1.0869 against USD. Brent crude saw its first weekly gain in three weeks to $84, driven by in the top two oil-consuming nations, China, and the United States, which have heightened expectations for increased demand.
Europe View Synopsis
Falling Eurozone inflation, rise in industrial production and steady growth projections are combining to boost ECB confidence. Germany's sentiment index beat expectations, but we are seeing a colling UK job market.

Eurozone inflation is falling, bolstering ECB's confidence in its 2% target by 2025. Growth projections for 2024 stand at 0.8% for the Eurozone and 1% for the EU, aided by expected rate cuts and rising wages. Industrial production rose by 0.6% in March, led by volatile Irish figures, but overall, still remains below pre-pandemic levels. Germany's ZEW Economic Sentiment Index beat expectations, hinting at a gradual recovery. The UK's cooling job market suggests a forthcoming rate cut, with declining vacancies and slower wage growth signalling an economic slowdown.
Eurozone inflation is easing, boosting ECB's confidence in hitting its 2% target by 2025. Growth projections for 2024 are 0.8% for the Eurozone and 1% for the EU.

Eurozone price pressures are easing, bolstering the European Central Bank's (ECB) confidence that inflation will return to its 2% target by 2025, faster than previously forecasted. This improvement is partly due to a milder-than-expected impact of Red Sea trade disruptions. Growth is projected at 0.8% for the Eurozone and 1% for the EU in 2024, driven by higher exports, increased tourism, and rising consumer spending. The ECB is anticipated to cut interest rates soon (June). This, combined with rising wages, is expected to further reduce inflation and enhance household spending. However, Europe’s recovery remains slower than other regions, facing challenges such as weak productivity, low investment, high energy costs, and geopolitical uncertainties.

Currently, headline inflation is at 2.4% and core inflation at 2.7%, with expected fluctuations around these values in the coming months. De Guindos stated that inflation should steadily move towards the ECB's price stability objective in the medium term. The ECB is expected to cut rates on June, with ongoing discussions about the pace and conditions for further easing.

We expect the ECB to cut rates in June, in line with market expectations. Additionally, we anticipate a smooth recovery in the second half of the year.
Industrial production
Industrial production in March rose by 0.6%, led by volatile Irish figures. Despite this, overall production remains below December levels, indicating ongoing weakness despite signs of stabilization and optimism.

Eurozone industrial production experienced a 0.6% MoM increase in March, largely influenced by a notable surge in Irish production, known for its volatility. Despite this uptick, production appears to be cautiously stabilizing, with a modest rebound anticipated in the latter half of the year. The broader industrial sector remains trapped in a downward trajectory since late 2022. Notably, Ireland's production spike by 12.8% contributed substantially to the March recovery, yet declines in Germany, Spain, France, Italy, and the Netherlands underscore prevailing underlying weaknesses. Recent surveys hint at a potential bottoming out, with businesses reporting a slower pace of production decline and a tentative resurgence of optimism among manufacturers. While the onset of recovery remains premature, expectations lean towards a gradual improvement in the second half, buoyed by anticipated boosts in consumer spending driven by real wage growth and a shifting goods cycle.

We expect the industrial sector's recovery in the latter half of the year, propelled by declining rates and heightened consumer spending. Nonetheless, achieving pre-pandemic levels remains a considerable distance away.
German economic sentiment
Economic Sentiment Index surpassed expectations, with improvements seen in both the Current Situation and Eurozone indices. Despite the gradual recovery, Germany still lags pre-pandemic levels. There is potential for a stronger rebound with anticipated rate cuts.

In May, Germany's ZEW Economic Sentiment Index rose to 47.1 from 42.9 in April, exceeding the market expectation of 46.3. The Current Situation Index also improved, reaching -72.3 from -79.2, better than the forecast of -75. Similarly, the Eurozone ZEW Economic Sentiment Index increased to 47 from 43.9, surpassing the expected 46.1. The ZEW Institute noted signs of economic recovery, highlighted by growing optimism in domestic consumption and the construction and machinery sectors, driven by positive assessments of the Eurozone and China as key export markets.

Germany's recovery is gradual, yet it remains distant from pre-pandemic levels. We expect that Europe's primary economy will initiate a more robust rebound later in the year and into 2025, particularly as rate cuts take effect, stimulating economic activity.
UK labour market
The UK's cooling job market, shown by declining vacancies and slower wage growth, suggests a forthcoming rate cut. Despite uncertainties, recent data signals a notable slowdown, with vacancies nearing pre-COVID levels.

The cooling UK jobs market, evidenced by declining vacancies and slower private sector wage growth, is increasingly supporting the likelihood of a near-term rate cut. Despite lingering uncertainties about the reliability of headline job figures due to survey response rate declines, recent labour market data suggests a notable slowdown. Vacancies have decreased further, nearing pre-COVID levels in the ratio to unemployed workers, with the vacancy-to-unemployment ratio now within spitting distance of the 2019 average. Alternative employment measures show flat to slightly negative trends, with official payroll data indicating no significant growth so far this year. Annual pay growth averaged 5.7% in March, unchanged from last month. This easing trend is reflected in gradual declines in wage growth, particularly in the private sector, which has dropped from 8.4% to 5.9% in annual terms since last summer. However, concerns persist regarding the reliability of wage data, with past artificial boosts now potentially exaggerating the decline. As the Bank of England reassesses its emphasis on wage growth, upcoming services inflation figures will be pivotal in determining whether rate cuts occur in June or August.

We anticipate that rate cuts will not occur until after the summer. Housing prices remain a factor exerting pressure on inflation, and wages continue to exert a pressure.
This commentary is for information purposes only and does not take into account the specific circumstances of any recipient. The information contained in this commentary does not constitute the provision of investment advice nor a recommendation, offer or solicitation to acquire (or dispose of) any financial instruments and/or services. Prior to making any investment decision investors should seek independent professional advice and draw their own conclusions regarding suitability of any transaction including the economic benefits and risks and legal, regulatory, credit, accounting and tax implications. The past performance of financial instruments is not indicative of future results and you may get back less than the amount you invested.

No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).

This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.

Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750).

Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved.