The European Central Bank left its deposit rate unchanged at 2.25% at Thursday's policy meeting but delivered its most explicit signal yet that a June rate cut is the base case. President Christine Lagarde told reporters the Governing Council "unanimously assessed that a further 25-basis-point reduction at our next meeting is warranted if incoming data confirms the current trajectory."
The shift comes hours after the April flash composite Purchasing Managers' Index plunged to 47.8 from 49.3 in March — the deepest contraction reading since the pandemic. Manufacturing PMI collapsed to 44.6, reflecting the full force of the Iran-driven energy shock on Europe's industrial base. Services also slipped into contraction at 49.1, suggesting the weakness is broadening.
Germany Bears the Brunt
Germany's composite PMI fell to 46.3, with the country's manufacturing base facing its 19th consecutive month of contraction. Bundesbank President Joachim Nagel, historically one of the ECB's most hawkish voices, acknowledged at the post-meeting press conference that "the risks to growth have shifted decisively to the downside." The German Finance Ministry is expected to revise its 2026 GDP forecast lower on April 30.
France's composite PMI held slightly above the 50 threshold at 50.2, while Italy and Spain both slipped into contraction at 48.9 and 49.1 respectively. The euro fell 0.4% on the announcement to $1.119 before recovering to $1.126 on the dovish Fed minutes released later in the day.
Markets Price Aggressive Cutting Cycle
Overnight index swaps now imply 88 basis points of ECB cuts by year-end 2026, up from 52 basis points before the PMI release. German 2-year Bund yields fell 6 basis points to 1.68%, while Italian 10-year BTPs rallied and the BTP-Bund spread narrowed to 112 basis points from 128 last week on the dovish policy pivot.
The Euro Stoxx 50 gained 1.6% on the week as European equities outperformed U.S. benchmarks. Bank of America's European equity strategy team upgraded euro-area stocks to overweight, citing valuations at a 28% discount to U.S. peers and the prospect of ECB support offsetting weaker growth. Sector flows show rotation into cyclicals, utilities, and financials.