In the Eurozone, inflation has continued to subside, mainly thanks to a moderation in services inflation. In March, the annual rate of increase in prices in this sector slowed to 3.4%, confirming a downtrend after reaching 4% at the start of the year. This slowdown is a relief for the ECB and reinforces expectations of a possible rate cut in April. However, the decisive factor will not only be this publication, but also the introduction of new tariff barriers, notably as part of trade retaliation measures, which could temporarily rekindle inflationary pressures. This could prompt some members of the Governing Council to argue for a pause in the current process of monetary normalisation.
Rates: rally by € rates driven by the release of Eurozone inflation data, which was followed by dovish remarks from some ECB policymakers regarding a possible rate cut this month. Investors are pricing in a further 60bp of rate cuts by the ECB this year. As a result, EGB curves moved in a bull flattening configuration, with the yield for the 10Y Bund pulling back below 2.70%, at its lowest since early March. The yield for the 2Y Schatz shed 3bp at 2.02%. Curves flattened, with the 5Y-30Y segment of the € swap curve trading at 20bp (-2bp over the session). Otherwise, BTP outperformed their European counterparts in response to a disappointing PMI, causing the 10Y BTP-Bund spread to tighten by 3bp to 110bp. In the United States, Treasuries continued to ease, fuelled by weaker-than-expected ISM and JOLTS publications.
Credit: there was a tightening of iTraxx indices yesterday (-0.4bp for the Main, -1.7bp for the X- Over), while the cash market outperformed (-1.3bp on average). Defensive sectors (utilities in particular) did outperform, however, as the market awaited the US administration's announcements on reciprocal tariffs. Banks also benefited from the market reversal, with SP spreads tightening by around 2bp-3bp, while T2 underperformed, tightening by just 1bp-2bp. Stellantis spreads widened slightly after S&P downgraded its rating to BBB (albeit placing it on Stable outlook).
Equities: there was a rebound ahead of the US tariffs announcement. The Stoxx 600 put on 1.1%, with techs, industrials and financials outperforming. The DAX also outperformed, gaining 1.7%. US indices were also in the green, with the Nasdaq closing up 0.9%, while the VIX was down 0.5 point, despite a rather disappointing macroeconomic news flow (JOLTS, ISM).
FX: the DXY dollar index declined by 0.11% to 104.1 amid widespread uncertainty ahead of Liberation Day, with the announcement of reciprocal tariffs expected today. Almost all G10 currencies rebounded against the US dollar on Tuesday. The euro corrected slightly to 1.080 against the US dollar, reacting to a sharper-than-expected decline in the Italian manufacturing PMI to 46.6 (consensus: 48) and to the Spanish PMI deteriorating by 0.2 point to 49.5. The market now puts at 80% the probability of a rate cut by the ECB on 17 April. Sterling remained stable against the dollar, the cable creeping higher by 0.05% to 1.292. The British currency put on 0.13% against the euro, with the EUR/GBP at 0.836. The Australian dollar was the G10 currency that appreciated the most against the US dollar, gaining 0.54% to 0.628, as the RBA decided to keep rates on hold and did not open the door to a rate cut in May. The currency had set a 1-month low at 0.622 on Monday. High-beta currencies benefited from the risk appetite, with the Norwegian krone and Swedish krona appreciating by 0.66% and 0.55%, respectively, against the euro (the EUR/NOK weakening to 11.29, the EUR/SEK to 10.79). Turning to emerging currencies, Latin American currencies rebounded the most against the greenback, with the Colombian and Mexican pesos putting on 0.76% and 0.65%, respectively (the USD/COP pulling back to 4,134, the USD/MXN to 20.33). According to a Reuters poll, economists do not expect an escalation of the trade war with these countries, with their governments possibly finding common ground with the US administration. ► Commodities: oil prices were trading lower near the close on Tuesday, with Brent down 0.25% around $74.5/bbl following a choppy session which saw the benchmark swing between gains and losses. Trump's tariff threat weighed on the market although reports that Indian refiners have been seeking alternative barrels following sanctions-risk associated with Russian crude was supportive. Kazakhstan's oil export capacity was impacted by a Russian order to close two of three moorings at Novorossiysk, a move which could impact 50% of CPC exports if the outage lasts longer than a week, according to sources quoted by Reuters. European gas prices closed 5.1% higher at €42.7/MWh.
