European Markets Rethink: ECB Rate Cuts on the Horizon

Money markets anticipate potential ECB easing as Eurozone inflation underperforms and U.S. tariffs loom. Investors expect an ECB rate cut, reducing yields. Economic slack, persistent weaknesses, and geopolitical tensions, particularly regarding tariffs, unsettle European markets. Political risks also rise in France with potential implications from far-right leader Marine Le Pen's trial.

Money markets increased their bets on potential easing by the European Central Bank (ECB), with short-dated yields falling to pre-major spending package levels in Germany. This shift comes as attention turns to U.S. tariffs and weak economic data.

The March inflation data fell short of forecasts in two of the eurozone's largest economies, while consumer price growth expectations remained subdued. Consequently, money markets are pricing in an 80% chance of a 25 basis points cut at the ECB meeting in April, compared to just 50% a week ago.

Germany's two-year yield fell to 2.028%, its lowest since March 4, amid escalating trade tensions. Moreover, Italian bond yields dropped, while the French-German bond spread stood at 69.5 basis points. Political uncertainties loom ahead, with Marine Le Pen potentially facing election disqualification in France.

(With inputs from agencies.)