European bond yields fell, Germany’s curve disinverted, France's bonds became riskier, equities rose, the euro stayed stable, and Brent crude dropped due to supply concerns.

Last week, European bond yields declined, with the short end of the curve seeing the most pronounced drop. Germany's yield curve is disinverting, mirroring trends in the United States, as the 10-year yield has now surpassed the 2-year yield for the first time since November 2022. In a notable shift, France's bonds are now perceived as riskier than Spain's for the first time since 2007, reflecting investor concerns over France’s rising debt and budget deficit. Equity markets reacted positively, with European stocks benefiting from China's newly announced stimulus measures. The euro remained steady against the dollar, trading at 1.1164. In the commodities market, Brent crude prices fell over 3% amid worries that China’s stimulus may not suffice to boost its economy, coupled with recession fears in the U.S. and expectations of increased oil supply from Libya and the OPEC+ coalition.

September Eurozone PMI data indicates a contraction in business activity, driven by declining manufacturing, stagnant services, rising job cuts, and pressures for ECB rate cuts amid easing inflation.

Eurozone PMI data indicates the first contraction in business activity in seven months, with the composite PMI decreasing to 48.9 from 51.0, primarily due to a significant decline in manufacturing and stagnant services growth. Manufacturing output plummeted to 44.8, marking the steepest contraction of 2024, while services growth decelerated to 50.5, the slowest rate since February. Contributing factors include weak demand, a pessimistic business outlook, and rising job cuts, particularly in manufacturing, which has seen job losses reach a four-year high. Although potential boosts from increased consumer spending—driven by higher real wages—and improvements in industrial order books exist, overall economic sentiment remains weak. Furthermore, Germany's Ifo index has fallen for five consecutive months, highlighting deeper stagnation amid rising insolvencies and negative news from the automotive sector. As the ECB faces pressures from easing inflation and declining consumer sentiment, the market anticipates further rate cuts of 25 bp in October, November, and December to encourage economic recovery.

September Eurozone PMI data showed the first contraction in seven months, driven by a steep manufacturing decline and stagnant services growth. Weak demand and falling confidence led to job cuts and slower inflation.

Eurozone PMI data indicated a contraction in business activity for the first time in 7 months, with the composite PMI falling to 48.9 from 51.0 in August, driven by a sharp decline in manufacturing output and stagnating growth in services. In its 27th month of recession, manufacturing production dropped from 45.8 to 44.8, marking the steepest contraction of 2024. Meanwhile, services growth weakened significantly, declining from 52.9 to 50.5, the slowest pace since February. The temporary boost in French services from the Olympic effect faded, causing the composite PMI to record its steepest drop in 15 months. The sustained decrease in new orders and a deteriorating business outlook prompted companies to cut employment for a second consecutive month. Input costs and output prices saw a notable deceleration in inflation, reflecting weakening demand. Germany and France posted pronounced downturns, while other Eurozone countries recorded only slight expansions. Manufacturing job cuts reached a four-year high, and hiring in the services sector nearly stalled, marking the fourth consecutive month of slowed employment growth.

We anticipate that the industrial sector will be the primary drag on Eurozone economic growth in 2024. Additionally, we foresee the services sector remaining subdued due to seasonal influences. In light of these conditions, we expect the ECB to implement rate cuts of 25 bp in both November and December.

Eurozone sentiment indicates easing inflation, with lower energy prices and stable expectations. Growth concerns are rising, putting pressure on the ECB to reconsider policy.

Eurozone economic sentiment indicators suggest a continued moderation in inflationary pressures in the short term. The Economic Sentiment Indicator (ESI) fell slightly from 96.5 to 96.2 in September, reflecting weaker growth prospects and reduced inflation concerns, thereby increasing the likelihood of a more dovish stance from the ECB. Recent data showed a significant decline in selling price expectations, particularly in the services sector, which could result in headline inflation below 2% for September. While lower energy prices are helping to curb overall inflation, the ECB remains focused on whether core inflation, especially in services, will follow suit. Meanwhile, the ECB’s Consumer Expectations Survey for August indicated a continued decline in perceived inflation and stable long-term expectations, suggesting that inflation expectations are currently well-anchored. As growth worries begin to overshadow inflation concerns, pressure is building for the ECB to consider easing its current restrictive monetary policy to support economic activity.

The ECB is well-positioned to implement further rate cuts, given the weakening consumer sentiment and declining inflation. We believe these adjustments could help stimulate economic recovery by early 2025.

Germany’s Ifo index fell for the fifth consecutive month, signalling deep economic stagnation amid rising insolvencies and negative automotive sector news, though potential consumer spending and industrial improvements could offer hope.

The country’s key leading indicator has declined for the fifth consecutive month, dropping to 85.4 in September from 88.6 in August, reflecting a deepening cycle of economic stagnation. This latest decrease brings the index back to levels not seen since early this year, with the current assessment component falling sharply to 84.4 from 86.4, while the expectations component slipped slightly to 86.3 from 86.8. The German economy has reverted to being the Eurozone’s growth laggard, showing few signs of imminent recovery following a contraction in the second quarter. Sentiment indicators for the first two months of the third quarter offer little optimism, as cyclical hopes have faded due to a weakening global economy, concerns over a cooling US economy, ongoing geopolitical tensions, and domestic policy uncertainty. Additionally, rising insolvencies and job restructuring announcements loom over the labour market, which has been one of the economy's few strengths. Negative news from the automotive sector further exacerbates these structural and cyclical issues, creating a reinforcing cycle of pessimism. However, potential positive surprises could emerge by year-end, as the highest increase in real wages in over a decade might encourage consumer spending. Furthermore, an improvement in industrial order books could help turn around the long-standing high inventory levels, potentially boosting industrial production.

We do not expect significant improvements in German consumer sentiment. We do not foresee a recovery until 2025.

Germany’s labour market is cooling, with weakening job growth, supporting calls for an ECB rate cut.

The German labour market continued gradually cooling in September, supporting dovish voices at the European Central Bank to consider an October rate cut. Although unemployment fell by 65,6k to 2.806 million, this improvement was among the weakest in September since 2001 and seasonally adjusted unemployment rose by 17k. The broader trend reflects slowing employment growth, driven largely by increases in part-time and low-wage positions, while recruitment plans and job vacancies are declining across industries. Additionally, rising bankruptcies and potential layoffs in the automotive sector suggest further labour market softening ahead, though demographic trends may help moderate the impact.

While unemployment in Germany remains stable, the labour market is deteriorating, characterized by an increase in part-time positions and a decline in job openings. We anticipate that this trend may worsen due to ongoing weaknesses in the manufacturing sector.