Increased bond market tensions likely to weigh on eurozone growth
The eurozone is facing heightened risks to its growth outlook, stemming from escalating tensions in the bond market and persistently high energy prices. As outlined in the full note by ING, while the economy maintained solid growth in Q3, increasing long-term interest rates and weakening consumer demand are poised to exert additional pressure. The ECB may consider another rate hike, but the aforementioned factors are likely to result in tighter financial conditions and a slowdown in economic activity. The desk anticipates challenges in maintaining consumer confidence and spending, which could limit growth further in subsequent quarters.
What the desk is arguing
The eurozone's growth trajectory is under threat from rising bond market tensions, high energy prices, and tightening financial conditions. Per the full note by ING, inflation remains elevated, constraining household spending capacity and raising the specter of increased austerity measures ahead of the 2027 budget season.
With the residential construction sector likely to feel the effects of higher borrowing costs, it is clear that both the government and consumer confidence are wavering under pressure. The note highlights the potential for ECB action, as inflation trends might push them toward another rate hike, complicating the growth outlook further.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Key firms contributing to this consensus include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, but contrasts with bofa, which takes a more cautious stance at the lower end of our target range. This disparity reflects shifting perspectives surrounding European fiscal discipline and the longer-term ramifications of bond market volatility.
How other firms see it
Broadly, firms like jpmorgan are aligned with our outlook, emphasizing a need for cautious optimism amidst tightening conditions. Conversely, bofa holds a contrary view, anticipating downward pressure on the euro as bond risks escalate.
In tandem with this narrative, the trajectory of EUR/USD is likely to be influenced by ECB decisions on interest rates and inflation dynamics, particularly in regards to upcoming economic indicators such as Eurozone GDP growth revisions and inflation reports.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased bond market tensions may weigh on eurozone growth.
- 02Persistently high energy prices exacerbate inflation concerns.
- 03Consumer confidence is weakening, impacting spending.
- 04Upcoming austerity measures could further challenge growth prospects.
Market implications
Key watch points include the EUR/USD as it approaches critical levels around 1.075, with potential volatility stemming from further ECB policy announcements. Additionally, growing concerns over Italian and Spanish bond spreads could influence risk sentiment in the eurozone.
Risks to this view
The primary risk to this call would stem from a surprising shift in ECB policy, such as a dovish pivot away from further rate hikes, which could alleviate pressure on growth. Additionally, unexpected fiscal measures by member states could improve market sentiment unexpectedly.
Articles Increased bond market tensions likely to weigh on eurozone growth Published 09:56 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Eurozone growth likely remained solid in the third quarter, but higher energy prices, rising long-term interest rates and sovereign bond tensions will weigh on activity. Inflation is still too high, pointing to another ECB rate hike, although quantitative tightening could be halted Peter Vanden Houte Higher energy and borrowing costs continue to weigh on the eurozone economic outlook October is the cruellest month October is budget season in Europe, when cash-strapped member states must show they can put their finances in order. France’s minority government has proposed a budget that curbs expenditure growth but would still fail to stabilise the debt ratio next year.
With presidential elections due in April and May 2027 and street protests mounting, few parties are willing to back austerity. We still expect the government to invoke Article 49.3 to pass the budget without parliamentary approval, but tensions may rise first. As for the rest of the eurozone, contagion has already widened bond spreads in other highly indebted member states, tightening eurozone financial conditions.
This will increase pressure on governments to adopt austerity measures, resulting in a less accommodative fiscal stance in 2027. Growth likely to slow temporarily Energy prices remain relatively high, while wage growth is failing to keep pace with inflation. Households drew on savings in the second quarter and may need to do so again to support spending.
Yet signs of a weakening labour market and renewed falls in consumer confidence point to softer consumption growth in the coming quarters. Residential construction may also gradually feel the impact of higher bond yields. Business sentiment suggests GDP growth remained moderate in the third quarter, but strengthening headwinds are likely to weaken the fourth quarter and the first quarter of next year.
Following a very strong second quarter, artificially boosted by Irish GDP figures, we now expect average growth of 1.0% in 2026. Assuming energy prices normalise in 2027, growth should average 1.2% next year. Second round effects remain more moderate than in 2022-23 Survey on selling price expectations Source: LSEG Datastream "> Source: LSEG Datastream Second-round inflation effects remain moderate The eurozone's harmonised index of consumer prices (HICP) inflation rose to 3.8% in September, with underlying inflation at 2.5%.
Energy prices are likely to lift the headline rate further in the coming months, while food prices, which are highly sensitive to energy costs, are also trending higher. Inflation is therefore likely to end the year above 4%. At the same time, second-round effects remain muted.
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