European government bond prices rose modestly. Analysts forecast German yields could hit 4%, potentially triggering a Eurozone crisis. Stock markets and Brent crude gained, while the euro weakened.

Government bond prices in Europe saw modest gains. The DAX dividend yield fell below the 10-year German Bund yield for the first time since February 2011. Analysts forecast that the German 10-year bond yield could reach 4%, the highest level since 2008, signalling the potential end of Europe’s era of cheap money. Rising borrowing costs may pressure German fiscal policies, challenge weaker EU economies, and force the ECB into difficult decisions. If the German Bund yield rises to 4%, yields on Italian, Spanish, and French bonds could reach levels that may trigger a new Eurozone crisis. Stock markets posted positive results, with Spain leading the gains at 2.62%. The euro weakened by 0.35% against the US dollar, while Brent crude prices rose 2.07%, marking a second consecutive week of gains, fuelled by new US sanctions on Iran and an updated OPEC+ production plan that raised concerns over supply shortages.

Eurozone inflation dropped to 2.3% in February 2025, driven by slower services and energy price growth. Germany's economic sentiment improved due to fiscal policies and rate cuts.

Eurozone inflation fell to 2.3% in February 2025, down from 2.5% in January, with core inflation at 2.6%. This decline was driven by slower price growth in services and energy. Services inflation eased from 3.9% to 3.7%, while energy prices slowed from 1.9% to 0.2%. Services contributed most to inflation, followed by food, alcohol, and tobacco. The decline reflects weak domestic demand, with businesses struggling to pass on rising costs to consumers. Inflation is expected to remain slightly above 2% in the coming year, supported by improved purchasing power, lower interest rates, and geopolitical risks. In Germany, the ZEW Economic Sentiment Index surged to its highest level in three years, driven by positive fiscal policy signals and ECB rate cuts. However, concerns over Trump's tariffs and the limited impact of stimulus measures on GDP growth could lead to volatile consumer sentiment.

Eurozone inflation dropped to 2.3% in February 2025, driven by slower services and energy price growth, with core inflation at 2.6%, amid weak domestic demand.

Eurozone inflation has moderated, with the annual inflation rate decreasing from 2.5% in January to 2.3% in February 2025, while core inflation fell from 2.7% to 2.6%. Price growth in the services sector eased slightly from 3.9% to 3.7%, and energy prices experienced a significant slowdown, dropping from 1.9% to 0.2%. The highest contribution to the annual inflation came from services (+1.66 pp), followed by food, alcohol, and tobacco (+0.52 pp), non-energy industrial goods (+0.14 pp), and energy (+0.01 pp). The overall decline is largely attributed to weak domestic demand, which is offsetting the reported rise in input costs, making it difficult for businesses to pass these costs onto consumers. Despite higher input costs, consumers have regained some purchasing power, though concerns about the broader economic environment and elevated savings rates persist. As a result, inflation in the Eurozone is expected to stay slightly above 2% in the coming year, with a gradual recovery in domestic demand driven by improved purchasing power and lower interest rates. However, geopolitical risks, including trade uncertainties and energy price fluctuations, introduce an element of unpredictability to the inflation outlook. For the ECB, the critical challenge remains determining the extent of rate reductions, with some governing council members expressing concerns about the potential consequences of overly aggressive rate cuts.

We believe that if Trump's tariffs are implemented, inflation will increase. Securing a trade agreement with the US would be a strategic option to mitigate this risk.

Germany's ZEW Economic Sentiment Index surged to 51.6 in March, driven by positive fiscal policy signals and the ECB's rate cuts, improving market sentiment.

Germany's ZEW Economic Sentiment Index surged 25.6 points to 51.6 in March, reaching its highest level in three years, driven by positive signals surrounding the country's fiscal policy, including a multibillion-euro financial package for the federal budget and ongoing parliamentary discussions on historic legislation to lift the debt brake. This sharp increase exceeded expectations, which had forecasted a rise to 48.3, and marked a significant improvement from February's 26.0. While the index of current conditions also showed an increase, it remained below expectations and was still at levels seen during the height of the pandemic. ZEW President Achim Wambach attributed the improved sentiment to expectations of favourable future fiscal policies and the European Central Bank's sixth consecutive interest rate cut, which has created more favourable financing conditions for both private households and businesses.

We expect consumer sentiment to remain volatile due to concerns over Trump's tariffs and the limited impact of stimulus measures on GDP growth.