Eurozone inflation slowed to 1.9% in May, down from 2.2% in April, marking the first time since September 2023 that price growth has dipped below the European Central Bank’s 2% target. Core inflation, which excludes volatile items such as food and energy, also declined to 2.4%, compared to 2.7% the month before. Policymakers are likely to welcome the news that services inflation eased to 3.2%, a significant drop from April’s 4%. These weaker figures have fuelled expectations that the ECB may cut interest rates at its meeting on Thursday. The case for a reduction is further supported by weak wage growth, falling energy costs, a strong euro, and an overall lacklustre economic performance across the region. After the data was published, the euro briefly lost ground against the U.S. dollar.
Last Friday, President Trump accused Chinese officials of backtracking on the trade agreement reached in Geneva, which had included plans to ease certain tariffs and restrictions on critical minerals. His administration specifically alleged that China has been delaying new shipments of rare earth magnets and other vital materials. President Trump also remarked that arranging direct talks with Xi Jinping has proven difficult. Highlighting that misunderstandings and mismatched expectations are currently littered throughout the recent negotiations process, Chinese policymakers dismissed the claims as unfounded and stated that they would take necessary steps to defend their national interests.
A survey released earlier showed an unexpected contraction in China’s manufacturing sector in May. The Caixin Global manufacturing PMI dropped to 48.3 from 50.4 in April, below expectations of 50.7 and marking the lowest level since September 2022. A reading below 50 indicates contraction.
On Tuesday, Bank of Japan Governor Kazuo Ueda said that the central bank would consider increasing interest rates once it becomes confident that both economic activity and inflation are set to pick up again following a phase of sluggish growth. He noted, however, that higher U.S. tariffs could create challenges for Japanese firms and might make next year’s wage talks with labour unions more difficult. Ueda also reiterated the Bank’s intention to steadily reduce its large-scale bond buying program. This move, which is aimed at moving away from years of aggressive monetary stimulus easing, will extend past March as part of a gradual policy shift.
Still to come this week we have the ECB’s interest rate decision, Eurozone PPI data and retail sales and U.S. jobs data.
Nicola Tune, Portfolio Specialist
