High stakes transatlantic (trade) poker, ECB back to neutral and the return of term premia

The US has paused a proposed 50pps tariff hike on EU goods – originally set for 1 June – until 9 July amid tense trade talks. Such a hike would raise average US tariffs on EU imports from 9% to around 30%, risking EUR100bn in EU export losses equivalent to 0.5% of EU GDP, with machinery, automotive and agrifood particularly at risk, especially in Germany, Italy and France. But the US would also feel the pinch, with inflation rising by 0.4pp and growth slashed by -0.2pp. For now, the EU is putting up a fragmented front, with some member states advocating a firm response, while others are wary of aggravating the US or compromising their national economic interests. Concessions such as LNG and agricultural imports, digital tax adjustments and defense cooperation are also being considered, but the EU needs to find a consensus among member states to avoid a disjointed or diluted response that would prevent meaningful trade relief, and undermine credibility in transatlantic diplomacy.

At its next meeting on 5 June, we expect the ECB to lower the deposit rate to 2.00%, reaching the self-proclaimed neutral rate after one year of rate cuts. Recent data has painted a mixed picture: while inflation surprised on the upside, supposedly because of the late date of Easter, survey data and national accounts continue to signal lackluster growth in the Eurozone. The more pressing concern is elevated global uncertainty, particularly around US trade policy. Although we expect the latest salvo of tariff threats (+50pps) to be negotiated down, the lingering uncertainty is likely to dampen sentiment and cloud any near-term economic rebound. We maintain our terminal rate forecast of 1.5% for this year, with slight upside risk. Meanwhile, passive quantitative tightening should proceed at full speed as long as Eurozone spreads remain stable.