Markets boost bets on ECB rate cuts on weak data, tariff fears

Zawya

28-03-2025

Money markets increased their bets on European Central Bank easing, with short-dated yields dropping to levels last seen before Germany announced its biggest ever spending package, as investors shifted focus to U.S. tariffs and weak economic data.
Inflation in March came in far below forecasts in two of the euro zone's largest economies, while consumer expectations for price growth remained muted.
Money markets priced in an 80% chance of a 25 basis points ECB rate cut in April from around 50% a week ago and a depo rate at 1.9% from around 1.95% late on Thursday.
German 2-year yield, more sensitive to the ECB policy rates, dropped to 2.028%, its lowest level since March 4. It was last down 3 bps at 2.04%.
On March 5, German parties reached an agreement for a massive ramp-up in fiscal spending on infrastructure and defence investment, leading to the biggest rise in German long-dated yields in decades.
"It seems likely that the ECB will conclude that the downside risks from escalating trade tensions are materialising," said Christoph Rieger, head of rates and credit research at Commerzbank, referring to the impact of tariffs on the central bank policy path.
More weak economic data, including inflation and jobs figures, supported Friday's drop in euro area bond yields.
The number of people out of work in Germany rose in March at the fastest rate since October of 2024, as Europe's largest economy is still battling with persistent weakness and structural headwinds in industry.
Meanwhile, morale among Italian businesses and consumers slumped in March, as geopolitical tensions and the prospect of U.S. trade tariffs clouded the outlook.
German consumer sentiment was broadly unchanged, with a focus on saving highlighting uncertainty among households.
"The confidence boost that German businesses had after the elections and the fiscal U-turn which followed has not been entirely embraced by consumers," said Carsten Brzeski, global head of macro at ING.
"Looking ahead, the gradual weakening of the labour market looks set to continue," he added.
Italy's 10-year yields dropped 5 bps to 3.83%. The yield gap between Italian BTPs and German Bunds - a gauge of risk premium investors ask to hold Italian debt - rose to 110.5 bps.
Citi flagged that "the tightening of BTP-Bund spread, even as Bund swap spreads richen, might be short-lived due to growth implications of tariffs and already tight spread levels."
The yield spread between French and German bonds stood at 69.5 basis points, at the lower end of its recent range.
Analysts argued that OATs faced a return of political risk starting next week that might determine whether early elections are called after July.
Marine Le Pen, leader of France's far-right National Rally (RN) party, will on Monday learn her fate in an embezzlement trial that could upend French politics if she is barred from running in the 2027 presidential election.
(Reporting by Stefano Rebaudo, editing by Alex Richardson)