Money market pricing is now seeing roughly 35% odds of a 50 bps rate cut by the ECB for their December meeting. That is up from less than 20% before the French and German PMI data. Meanwhile, €STR futures are now implying a ~44% probability of a 50 bps rate cut. For some context, the probability of that was just around ~26% in European trading yesterday.
The more sluggish readings highlight increased economic risks for both of Europe’s largest economies. The manufacturing recession in the region is still persisting but now the services sector is also starting to slip towards contraction territory. And that’s not a good sign whatsoever as we look towards the new year.
Trump tariffs will only add to further risks to trade and raise more concerns surrounding the outlook for the euro area. In turn, that might be an incentive for the ECB to cut rates at a quicker pace than anticipated.
I think at the balance now, all of this reaffirms a 25 bps rate cut for next month. It would be unlikely for policymakers to preemptively move by 50 bps in anticipation of Trump tariffs. I mean, the tariffs should definitely materialise early next year but it’s a bit too presumptuous for a central bank to be making moves like that.