The main focus today is on German inflation data, which is the sole item of interest. Recent data from France and Spain has fallen short of expectations, increasing the likelihood of a 25 basis point cut at the next ECB meeting.
Additionally, a report from the WSJ indicates that Trump is contemplating implementing broader and higher tariffs, potentially increasing by up to 20%. This news may contribute to a cautious market sentiment leading into the April 2 event.
Key Drivers Of Market Sentiment
The earlier part highlights two main drivers impacting sentiment: underwhelming inflation prints from France and Spain, and fresh speculation around broad-based tariff plans from the former U.S. leader. For the eurozone, disinflation in its larger economies points towards softer monetary tightening expectations. With Germany’s figures due next, markets are likely to view any downside surprise as another step closer to a rate cut from the European Central Bank—possibly as soon as the next meeting.
That French and Spanish inflation came in below forecasts suggests domestic demand pressures might be easing more sharply than previously assumed. From our viewpoint, this shifts attention to how the ECB will respond, since more subdued price growth across the bloc weakens the case for maintaining high interest rates. The German numbers, due shortly, may either confirm this milder trajectory or throw it into question. However, unless inflation picks up meaningfully there, bond yields are unlikely to resume a sustained move higher.
Lagarde faces a difficult policy call, but weaker regional inflation data supports a more dovish tilt. For us, the implication is that expectations around the June meeting have moved closer to near-certainty for a cut of 25 basis points. It continues to price in a total of three such moves across the rest of the year. Any deviation could trigger short-term repricings across risk assets and European rates alike.
Tariff Concerns Add To Market Uncertainty
Meanwhile, markets were unsettled midweek by headlines from the Journal suggesting a potential plan by Trump to hike trade tariffs up to 20%, reviving concerns of a more protectionist tone should he regain office. That development, occurring just ahead of a key campaign event on April 2, injects a degree of unease into pricing for equities, especially those exposed to global trade cycles. While not an immediate economic shift, it adds a layer of geopolitical risk that may affect short-term appetite for higher-beta names.
Moving into next week, the focus should remain fixed on European inflation prints and any new communication from policy officials. With volatility still fairly contained but downside risks in the data building, positioning in the options space may start to lean towards increased hedging. Any tactics taken now must consider both macroeconomic signals and the added noise from U.S. political developments. Traders should act sooner rather than later to reflect any narrowing in yield differentials, especially on the short end of European and U.S. curves. Traders positioned around euro rates will want to front-load expectations before the market consensus fully converges on the next ECB step.
