The economy is really bad, JPMorgan Chase believes the European Central Bank needs to cut interest rates by 50 basis points in December

Due to the slowdown in economic activity in the Eurozone, JPMorgan predicts that the European Central Bank may significantly cut interest rates by 50 basis points in December.

Previously, the bank believed that the ECB would need to wait until January to accelerate its easing measures. Now, analysts have raised the likelihood of a significant rate cut next month from 10% to 20%. Analyst Greg Fuzesi stated in a report:

"The recent sharp decline in the PMI index, the slowdown in service price increases, the uncertainty in trade conditions, and the already high interest rates provide ample justification for a rate cut."

Following the report's release, German bonds continued to rise, with the two-year government bond yield falling by 5 basis points to 1.95%, the lowest level since November 2022.

Economic downturn forces ECB to consider more aggressive monetary policy

In November, business activity in the Eurozone unexpectedly contracted, core inflation rates declined, and Germany's inflation data also fell short of expectations.

JPMorgan economists believe that although the dovish members within the ECB do not seem strongly inclined towards a significant rate cut, the rapid changes in economic data force the central bank to consider more aggressive monetary policies.

On Friday, Governing Council member Francois Villeroy de Galhau stated that the ECB should continue to cut rates, with the exact pace of easing to be determined in the coming months. Earlier this week, Council member Isabel Schnabel expressed a more hawkish view, stating that borrowing costs are nearing levels that no longer suppress the economy.

Fuzesi stated:

"Although the dynamics within the Governing Council can sometimes lead to incomprehensible outcomes, we believe that the data has changed in a way that makes a 50 basis point rate cut in December possible."

Rate cut expectations drive down French bond yields

This week, the situation in France has been turbulent. French government bond prices have continued to fall, with yields soaring to levels comparable to Greece. Investors are concerned that the opposition may overthrow the current government, leading to political instability in France.

However, due to monetary market expectations that the ECB will accelerate rate cuts, French bonds ended the week of turmoil, erasing the yield spread with German bonds. Yields on government bonds in countries like Germany and Italy also declined accordingly.

French Prime Minister Michel Barnier is attempting to curb the rising debt through the 2025 budget proposal, but faces strong resistance from the opposition, and there is even a risk of government collapse.

Additionally, this year's budget deficit in France is increasingly becoming a larger share of GDP, and many are skeptical about the feasibility of lowering budget targets