The euro-zone economy is growing at a steady pace. While Spain is still the clear outperformer among the larger countries, Germany has finally returned to growth, but France has stalled. Business surveys suggest that growth in the euro-zone remains resilient in Q3. Meanwhile, the labour market continues to be much less tight than it was back in 2022. Core and services inflation have not risen since the start of the Iran war and we see little risk of second-round effects. This is a key reason why we think the ECB will soon reverse any rate hikes it makes this year, probably by the end of 2027. This would be a much lower path for policy rates than is discounted in the market, so we expect Bund yields to fall.
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