European bond yields fell after the ECB cut rates. Stock markets rose, except in Portugal, while Brent crude oil prices dropped over 7%.

European bond yields fell in response to the ECB's interest rate cut this week, resulting in a shift in the yield curve that reflects similar trends observed in the U.S. Additional rate cuts may be forthcoming, which could further elevate bond prices. Given the long end of the curve's inherent sensitivity to global and U.S. developments, further flattening of the yield curve is expected. Overall, stock markets performed well, with the exception of Portugal, which saw a decline. The euro remained under pressure, trading at 1.0869 against the dollar. In the commodities market, Brent crude oil prices declined by over 7%, primarily driven by indications that Israel is likely to refrain from targeting Iran’s oil infrastructure—a significant concern for the market—as well as ongoing economic weakness in China.

The ECB has cut interest rates to address concerns over Eurozone growth and inflation, projecting a potential recovery in early 2025. Current inflation is low, while industrial production showed a brief increase, though long-term challenges remain. Further rate cuts are likely unless recovery indicators appear.

The European Central Bank (ECB) has announced a 25 basis point (bp) interest rate cut, reducing the deposit rate from 3.5% to 3.25%. This unanimous decision by policymakers addresses escalating concerns over economic growth and inflation in the Eurozone, with President Christine Lagarde emphasizing a data-driven strategy. In its September assessment, the ECB projected a brief economic slowdown in the first half of the year, followed by a potential recovery, with inflation anticipated to ease to 2.0% by year-end. However, the current slowdown appears more pronounced than expected, with inflation already below 2%. As of now, Eurozone inflation is at 1.7%, the lowest level since April 2021, while core inflation stands at 2.7%. Although industrial production increased by 1.8% in August, signalling short-term momentum, longer-term challenges persist. Moving forward, the ECB is likely to prioritize growth over inflation, with further rate cuts anticipated unless clear signs of recovery emerge.

The ECB's recent interest rate cut reflects concerns about eurozone economic growth and inflation. President Lagarde emphasized a data-driven approach while noting persistent inflationary challenges and the potential for further rate reductions.

The ECB has announced a reduction of 25 bp in interest rates, reflecting increasing concerns about the eurozone's economic outlook. This decision, made just five weeks after a previous cut, lowers the deposit rate from 3.5% to 3.25% and has received unanimous support from policymakers in a notably dovish communication. The adjustment addresses growing worries regarding lacklustre growth and inflation levels currently falling below targets. During a recent press conference, ECB President Christine Lagarde aimed to reassure stakeholders about economic growth while acknowledging a decline in inflationary pressures. In its September assessment, the ECB projected a brief economic slowdown in the first half of the year, followed by a potential recovery, with inflation anticipated to ease to 2.0% by year-end. However, the current slowdown appears more pronounced than expected, with inflation already below 2%. As the ECB navigates this complex economic landscape, it is prepared to pursue further rate cuts unless clear indicators of recovery materialize, while Lagarde emphasized that monetary policy remains restrictive amid ongoing inflationary challenges.

We anticipate that the ECB is poised to prioritize growth over inflation in its forthcoming monetary policy decisions. Although markets are currently assigning a 25% probability to a 50 bp rate cut in December, we consider this scenario highly improbable, as it could exert downward pressure on the euro. Instead, we expect the ECB to concentrate on accelerating the frequency of rate cuts rather than increasing their magnitude.

Euro area inflation fell to 1.7% in September 2024, with core inflation at 2.7% and energy costs declining significantly.

The annual inflation rate for the euro area was revised downward to 1.7% in September 2024, a decrease from initial estimates of 1.8% and 2.2% in August. This marks the lowest inflation rate since April 2021. Monthly, inflation experienced a slight decline of 0.1%, indicating a movement toward deflation. Service sector inflation, which remains persistently high and challenging to mitigate, decreased to 3.9%, down from 4.1% previously. Additionally, energy costs fell at a faster rate, dropping to -6.1% from -3%. The annual core inflation rate, which excludes energy, food, alcohol, and tobacco prices, also saw a decrease to 2.7%, down from 2.8%, aligning with the preliminary estimate.

We believe that inflation is currently under control and do not anticipate any significant increases, partly due to the overall economic weakness in the Eurozone.

Eurozone industrial production surged 1.8% in August, which could boost Q3 growth, but long-term recovery faces ongoing challenges.

Eurozone industrial production jumped by 1.8% MoM in August, offering a potential boost to Q3 growth despite disappointing survey data. Germany led the recovery with a 3.3% increase, rebounding from a July slump, while France and the Netherlands posted gains of 1.4% and 2.2%, respectively. This mid-quarter improvement supports economic activity, but the long-term outlook for the industrial sector remains uncertain amid persistent challenges like competition from China. This could shift, however, as Europe considers imposing tariffs on Chinese products, following the U.S.'s lead, with talks scheduled for late October. Volatile energy costs, labour shortages, and supply chain disruptions further cloud the outlook. Although inventory reductions may support future production, significant improvements are not expected until 2024, with a sustained recovery likely delayed until 2025.

Considering the ongoing weakness in the manufacturing sector and the persistent challenges it faces, we do not anticipate a meaningful recovery until 2025.