Eurozone economy expanded 0.3% qoq in 2Q, the same pace as quarter before, suggesting the economy is recovering from last year’s stagnation. Yet incoming data has been less inspiring, including subdued Ifo indices for the last 3 months, weakening PMIs and soft industrial production readings. Activity in the heavyweight German economy has been anaemic, marked by the 0.1% decline in 2Q despite inflation coming off highs. By contrast Spain continued to lead with +0.8% qoq increase, followed by France at +0.3%. Inflation, on the other hand, unexpectedly ticked up to 2.6% yoy in July from 2.5% month before, on the back of higher energy inflation. The stickier services inflation moderated slightly but was still firm at 4% from 4.1% month before, suggesting simmering pass through from higher wages. Germany’s inflation also quickened in contrast to expectations, triggering a stagflationary impulse.
The mix of tentative growth signs alongside firm inflation poses a dilemma for the next rate review. While the rate reduction in Sep is not a done deal, we expect softer growth conditions to outweigh price concerns and result in the second small cut next month. The ECB, on its part, is likely to continue with its meeting-by-meeting approach and remain data dependent. Our FX Strategist has noted in recent pieces that the currency was relieved after the France far-right National Rally party fell to third position in the second round of the French elections but continues to feel the drag from unwinding of yen carry trades. EUR/USD is back at 1.08, after repeated failures to test past 1.0950 since February.
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