Against all expectations, the ECB surprised the markets. As expected, it implemented a further rate cut—the eighth in a year—bringing the deposit rate to 2%. But it was Christine Lagarde's tone that caught the attention. The ECB president displayed unexpected firmness, stating that the institution was "at the end of a monetary policy cycle." This was a strong, unusual stance. As a result, a pause now seems certain at the July meeting, and according to market expectations, it will likely take until December to consider a further rate cut. The ECB therefore remains cautious, and rightly so. The geopolitical climate, particularly rising trade tensions, complicates the equation. US tariffs, by slowing activity, are rather disinflationary; however, the expected response from Europe could revive price pressures. On the inflation front, Christine Lagarde is careful not to declare victory. But the projections are relatively clear: price increases are expected to return to 2% in 2025, decline to 1.6% in 2026—a base effect linked to energy—before stabilizing again at 2% in 2027.
On the other side of the Atlantic, the task is daunting for the Fed, which is undoubtedly awaiting more clarity on the trade war being waged by the White House. Moreover, on this point, we should note the tentative improvement between China and the United States. Donald Trump and Xi Jinping have finally spoken. This is their first direct exchange since Trump's inauguration, and the two leaders agreed to resume trade negotiations. As promised, they have done: their delegations met in London over the weekend, and the initial feedback has been quite positive. Beijing has reportedly agreed to accelerate procedures allowing foreign companies to access rare earths. This renewed dialogue bodes well, especially as the prevailing uncertainty continues to weigh on activity. The latest macroeconomic indicators bear this out: according to ADP, private sector job creation slowed significantly in May (37,000 versus 114,000 expected, after 60,000 in April). Official employment figures for May are a little more encouraging, reporting non-farm job creation slightly above expectations. However, these data must be qualified, as the results for the two previous months were revised sharply downward (-95,000). The ISM indices disappointed; the services indicator, expected to improve, slipped into contraction territory at 49.9, versus 52 expected and 51.6 in April. The cause: the decline in new orders. Furthermore, the ISM highlights an acceleration in prices paid by companies, signaling a resurgence of inflationary pressures. In addition to rising costs and uncertainty for businesses, escalating trade tensions between the United States and China have caused significant disruptions to supply chains since China restricted its rare earth exports in April. Upcoming inflation data will likely reflect these new tensions, so we'll be closely monitoring the CPI release, expected on Wednesday.
