European bonds rose, stocks fell, euro gained, oil dropped amid trade tensions and recession fears.

European government bond prices climbed as investors sought safer assets amid escalating trade tensions and growing recession fears, driving yields sharply lower. Stock markets posted steep declines, while the euro strengthened 1.14% against the dollar. Brent crude prices tumbled 8.93%, pressured by China’s new tariffs on U.S. goods—an escalation in the trade conflict that further weighed on market sentiment.

Eurozone inflation dropped to 2.2% in March, driven by lower energy and services prices, while modest private sector growth continues amid inflation risks from US tariffs.

Eurozone inflation eased to 2.2% in March, driven by lower energy prices (-0.7% YoY) and a notable reduction in services inflation, with core inflation dropping from 2.6% to 2.4%. The decline was partly influenced by the timing of Easter holidays, but businesses in the services sector reported weaker price expectations, suggesting that lower inflation may persist beyond seasonal factors. Despite potential inflationary pressures from US tariffs and retaliatory measures, the soft inflation data strengthens the case for an ECB rate cut, moving policy rates closer to neutral. The Eurozone private sector showed modest growth, with the PMI rising to 50.9, driven by expansion in manufacturing and services, though new business levels contracted. Employment increased for the first time since July 2024, and price pressures eased. While growth is slow, inflationary risks and potential impacts from US tariffs could still pose challenges in the coming months.

Eurozone inflation eased to 2.2% in March, driven by lower energy and services prices, with soft inflation data supporting a potential ECB rate cut.

Eurozone inflation continued its decline in March, falling from 2.3% to 2.2%, driven not only by lower energy prices (-0.7% YoY) but also by a significant reduction in services inflation. This trend, partially influenced by the late Easter holiday, points to a dovish outlook for the European Central Bank (ECB), which is also facing potential trade disruptions that could impact inflation. Core inflation, which had remained steady at 2.7%, also showed signs of easing, dropping from 2.6% in February to 2.4% in March, largely due to weaker services inflation, which fell from 4% in December to 3.4%. While the Easter effect likely contributed to the decline, businesses in the services sector have reported softened price expectations and weaker activity, suggesting that the reduction in inflationary pressures may persist beyond short-term seasonal factors. Despite heightened short-term inflation risks, particularly from the deflationary impact of US tariffs, potential retaliatory measures from the European Commission could exert upward pressure on inflation. With important developments expected regarding US tariffs and European responses in the coming weeks, the ECB’s April meeting will be pivotal in shaping the future direction of interest rates. Nonetheless, the soft inflation data strengthens the case for a rate cut, moving the policy rate closer to neutral.

We expect Eurozone inflation to remain soft due to lower energy prices and weaker services inflation, though US tariffs could push inflation slightly higher.

Eurozone private sector expanded modestly in March, with PMI rising to 50.9. Growth was driven by manufacturing and services, despite contracting new business and easing price pressures.

In March 2025, the Eurozone private sector continued its modest yet sustained expansion, with the HCOB Eurozone Composite PMI Output Index rising to 50.9, up from 50.2 in February, marking a 7-month high. This represented the third consecutive month of expansion, although the growth rate remained below the long-term average of 52.4. Both manufacturing and services contributed to the upturn, with goods production increasing for the first time in two years, while service sector activity rose at a quicker pace than in February. The HCOB Eurozone Services PMI Business Activity Index reached 51.0, up from 50.6 in February, marking a 2-month high. Despite these gains, new business levels continued to contract, with demand for goods and services falling at a marginally slower rate. Employment rose for the first time since July 2024, with the overall rate of job growth reaching its highest level in nine months, albeit still modest. The increase in workforce numbers was primarily driven by stronger hiring in services, while manufacturing saw a softer rate of job shedding. Price pressures eased during the period, with input costs rising at their slowest pace in 2025 and output prices increasing at the least marked rate of the year to date. Sentiment for the next 12 months remained positive, although it dipped slightly to a three-month low, still weaker than the long-term average.

We expect that the Eurozone economy will remain stagnant; however, inflationary pressures and potential tariff impacts from the U.S. could pose risks to the economy.

Germany's inflation eased in March, driven by lower energy prices and slower service cost growth, but volatility persists due to energy fluctuations and geopolitical risks.

Germany's inflation eased slightly in March, with the headline rate declining from 2.3% in February to 2.2% YoY, while core inflation, excluding energy and food, fell from 2.7% to 2.5%. The primary driver behind this moderation was a sharper drop in energy prices, which declined by 2.8% compared to 1.6% in the previous month, alongside slower price increases for services, which eased from 3.8% to 3.4%. Regional data indicates that falling alcohol, transportation, heating oil, and gasoline prices contributed to the decline, though rising clothing and leisure costs exerted upward pressure. Despite this easing, inflation is expected to remain volatile due to fluctuating energy prices and potential geopolitical disruptions, while trade tensions and retaliatory tariffs could introduce short-term inflationary pressures. In Germany, a cooling labour market may alleviate wage-driven inflation, but the delayed impact of rising service costs could counterbalance this effect. As a result, headline inflation is projected to fluctuate within a range of 2% to 2.7%. Given these dynamics, the European Central Bank faces a complex policy landscape ahead of its next meeting, where all options remain open, particularly as accelerating disinflationary trends could prompt further adjustments toward neutral policy rates.

We anticipate increased volatility in the coming months, primarily driven by the potential escalation of trade wars.