Slow and Steady Central Banks Brace for Tariff Impacts

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Eurozone Market Update

Donald Trump’s U.S. election victory saw markets pricing in potential adverse effects on European growth due to the prospect of new tariffs, increasing expectations for an accelerated pace of ECB rate cuts. ECB officials, including Vice President Luis de Guindos, stressed a data-driven approach but flagged inflation risks below the 2% target. Eurozone inflation fell to 2.4% in November versus expectations of 2.6%, strengthening the case for monetary easing. ECB Governing Council member François Villeroy de Galhau suggested flexibility on the size of potential cuts, leaving options open for December. The Eurozone Composite Purchasing Managers’ Index (PMI) dropped to 48.1, its lowest level since January, with significant declines in services and manufacturing across key economies. This data fuelled market speculation for a 50 bps cut, though we anticipate a more cautious 25 bps move, reflecting the ECB’s measured stance.

_{Source: Bloomberg, data as of 29 November 2024}