Eurozone Stagnates, Germany/France Contract, ECB Cuts Rates

This weakness was largely driven by contractions in Germany (-0.2%) and France (-0.1%), alongside flat growth in Italy. In contrast, peripheral economies like Portugal (+1.5%), Lithuania (+0.9%), and Spain (+0.8%) showed stronger performance, while Ireland experienced the sharpest decline (-1.3%).

This disappointing economic data reinforces expectations for the European Central Bank to implement a 25-basis-point rate cut, bringing the main refinancing rate to 2.75%, with markets pricing in four cuts by the end of 2025. The ECB faces pressure to stimulate growth as inflation moves towards its 2% target, though President Lagarde emphasizes the need for broader fiscal and structural reforms.

This policy stance widens the divergence with the US Federal Reserve, where Chair Powell signals no immediate rush for rate cuts due to a robust US economy. Market reactions saw the euro hold steady at $1.04, while sovereign bond yields across the Eurozone fell, reflecting increased demand for safe-haven assets.

Equities showed a mixed response, with the Euro STOXX 50 up 0.5% and Germany's DAX hitting a new record high, partly boosted by strong earnings from ASML, though Deutsche Bank shares declined.