TD Securities identifies the ECB Watchers’ Conference as a significant venue for policymakers, including Lagarde, Lane, Rehn, and Kocher, to discuss the impact of geopolitical risks and Eurozone monetary policy. The bank expects officials to reiterate that the ECB is prepared to act if necessary but requires additional time to assess evolving risks, particularly in light of recent developments since the projections presented at the meeting on the 19th [1].
March PMIs across France and Germany showed notable divergence. France’s services sector experienced a sharper contraction, with the PMI dropping to 48.3 (TDS/mkt: 49.0), attributed to weakened demand amid geopolitical uncertainty and pre-election caution. In contrast, German manufacturing saw its strongest production growth in over four years, with the PMI rising to 51.7 (TDS: 49.0; mkt: 49.5), driven by increased orders linked to the Middle East conflict and stockpiling efforts [1]. Both economies faced surging input costs, especially for energy and materials, but firms have not yet passed these costs onto consumers, temporarily easing monetary policy concerns [1].
Labor market conditions deteriorated in both countries, with jobs being cut more quickly and replaced more slowly. Business sentiment across firms declined sharply in response to uncertainty stemming from the Iran conflict [1].
TD Securities notes that the ECB Governing Council is in a stronger position than in 2022, allowing for more time to make informed decisions. The expectation is that ECB officials will maintain a cautious stance, echoing Lagarde’s position that more observation is needed before taking action [1].
CONCLUSION
The ECB is signaling a cautious approach, emphasizing the need for further assessment of geopolitical risks before making policy changes. Diverging PMIs in France and Germany, along with rising input costs and deteriorating sentiment, highlight the complexity of the current environment. Market participants should expect continued prudence from the ECB as it monitors evolving risks.