The European Central Bank is now widely expected to deliver a surprise 50 basis point rate cut at Thursday's policy meeting, money market pricing showed late Friday, after Germany's flash composite Purchasing Managers Index for April collapsed to 41.0, the lowest reading since April 2020 and far below the 47.5 consensus forecast. The reading triggered a sharp re-pricing of European rate expectations and a 1.4% slide in the euro to $1.0640.
Germany's manufacturing PMI sub-index printed at 38.4, while the services component fell to 43.1. Both readings are deeply in contraction territory and reflect the cumulative damage from the Iran-driven energy spike, US-EU trade tensions, and weak Chinese demand. New export orders collapsed to 36.2, a level historically associated with double-digit declines in industrial production.
Lagarde Faces Activist Choice
ECB President Christine Lagarde will preside over Thursday's decision facing a clear economic case for aggressive easing but a more politically complex backdrop. The euro's 6.4% appreciation against the dollar over the past three months has provided meaningful disinflationary cover, but core inflation in the eurozone remains at 2.6%, slightly above the ECB's 2.0% target.
Sources familiar with internal Governing Council deliberations told reporters that ECB Executive Board members Isabel Schnabel and Philip Lane have publicly broken with the previous "patient and measured" approach and are advocating for "decisive action" at Thursday's meeting. The dovish bloc within the Council has expanded to include Bank of Italy Governor Fabio Panetta and Bank of Spain Governor Pablo Hernández de Cos, putting Lagarde in a position where a 50 basis point cut may be the path of least internal resistance.
European Bond Rally Continues
German Bund yields fell sharply across the curve following the PMI data. The two-year Schatz yield collapsed 18 basis points to 1.94%, while the 10-year Bund declined 12 basis points to 2.41%. Italian BTP spreads tightened to just 96 basis points over Bunds, the narrowest level since 2021, as investors priced in supportive monetary conditions for the periphery.
European banking stocks paradoxically rallied despite the prospect of compressed net interest margins, as the prospect of aggressive ECB easing was interpreted as supportive for credit demand and asset quality. The Stoxx 600 Banks Index closed Friday up 2.1%, while individual names including BNP Paribas, ING Group, and BBVA all gained between 1.5% and 3%.