The euro zone\u2019s first-quarter GDP was revised into contraction at -0.2% quarter-on-quarter, largely due to Ireland, where GDP was cut to -12.1% qoq. Ex-Ireland growth was 0.3% qoq, alongside firmer PMI readings and stronger French industrial data, shifting the focus away from a broad-based slowdown. While sentiment weakness remains concentrated in Germany and France, the latest French hard data moved in a more supportive direction.<\/p>\n
In France, the risk of a second consecutive quarterly decline in GDP in the second quarter has receded. On prices, headline inflation printed at 3.2% year-on-year in May, and underlying inflation was 2.5% yoy. Projections point to peaks in early 2027, with headline inflation seen around 3.8% yoy and core inflation around 2.8% yoy.<\/p>\n
We believe the market is misinterpreting the recent negative GDP report for the Euro area. The headline figure was dragged down almost entirely by a volatile, one-off revision in Ireland, and this statistical noise hides the underlying stability of the wider European economy. Excluding Ireland, the Eurozone actually grew, which suggests the narrative of a deepening slowdown is misplaced.<\/p>\n
The latest economic indicators support a more optimistic view than the GDP print suggests. For example, the S&P Global Eurozone Composite PMI for May recently came in at 52.6, well into expansion territory and indicating the strongest private sector growth in a year. This aligns with stronger industrial data out of France, reducing the chances of a technical recession there and suggesting economic resilience.<\/p>\n
This data disconnect creates an opportunity in interest rate markets ahead of the next ECB meeting. Current market pricing seems to be assigning a lower probability of future rate hikes due to recession fears, which we see as unfounded. With Eurostat’s latest flash estimate showing inflation holding firm at 3.3% in May, the ECB’s focus will remain on tackling price pressures.<\/p>\n
Our own projections show inflation won’t peak until early 2027, meaning the central bank’s job is far from over. This historical persistence in inflation, seen during other post-crisis periods, suggests the ECB will need to maintain a hawkish stance for longer than many anticipate. Therefore, derivative markets appear to be underpricing the forward path for European interest rates.<\/p>\n
Given this view, we see value in positioning for higher short-term rates than the market currently expects. Options that profit from a rise in EURIBOR or swaps that bet against a dovish ECB pivot in the coming weeks look attractive. We anticipate a repricing of rate expectations as the market looks past the Irish GDP distortion and focuses on the more resilient core data.<\/p>\n","protected":false},"excerpt":{"rendered":"
Eurozone GDP dip driven by Ireland; ex-Ireland growth solid, PMIs improving, inflation persistent, ECB hawkish, rates underpriced.<\/p>\n","protected":false},"author":87,"featured_media":47758,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[71],"tags":[],"class_list":["post-49778","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t