European bond rally may have reached a turning point

As Barclays analysts in London noted on Friday:

Euro area industrial production inched down 0.1% m/m in January, slightly weaker than our downwardly revised, below-consensus projection. This is consistent with an annual growth rate of 1.2% y/y, up from 0.6% y/y in December. Data for December have been revised up 0.3pp to 0.3% m/m. IP in France, Portugal and Spain rose, while it was flat in Germany and surprisingly, fell in Italy.

·      Overall, euro area industrial production has been rising very modestly in the past few months, echoing developments in manufacturing confidence. PMIs climbed to a six-month high in February, but improved only slightly since a local trough was reached in November. They have continued to hover around 51.0 since August 14, a level consistent with muted growth. A similar message was sent by the European Commission survey. Assuming euro area IP is flat in February and March, the carry over for Q1 15 would be 0.2% q/q, slightly down from 0.4% q/q in Q4 14, suggesting a broadly neutral contribution to GDP. 

·      Details revealed that durable goods led the headline fall (-2.2% m/m), largely offsetting energy output, the only subcategory in decent positive territory (+0.9% m/m). Non-durable consumer goods and capital goods output inched up just 0.1% m/m, while intermediate goods fell 0.5% m/m (Figure 5). Manufacturing output declined by 0.3% m/m, nonetheless consistent with an upward 3m/3m trend up to 0.9% in January. In terms of sector, chemicals, metals and machinery and equipment output fell moderately, while motor vehicles output rose significantly. All 3m/3m trends are in positive territory in January.