In March, consumer prices rose in Europe at an annual rate of 2.4%, slightly below expectations, giving investors hope that the ECB will initiate rate cuts in June.

However, concerns about possible shocks persist. As a result, European stock markets, while not in a hurry to go lower, appear to have temporarily topped out.

What could hinder an early reassessment of monetary policy?

Let's start with overly optimistic data. The analysis of annual growth rates may not provide meaningful data due to the pass-through effect of the initial inflationary spike.

In reality, the figures still exceed the norm.

The average monthly price growth rate from January to March for 2010-2019 was 0.12% in 2017-2019 and 0.34% for January-March 2024.

Thus, inflation in Europe over the past three months has now been twice as high as usual. This can be partly attributed to energy prices and the rebound in utility costs.

Consequently, it is premature to speculate on a rate cut by the regulator. Further progress in curbing inflation is needed to avoid missteps.

In addition, it is essential to consider the risks of a further rise in prices, of which there are many—first, the repercussions of worsening global geopolitical tensions.

For example, confrontations between Iran and Israel could disrupt the global supply chain. In addition, oil prices would skyrocket, as we have seen above.

Second, trade wars could lead to price increases. If the EU imposes tariffs on Chinese cars as early as July, a possible retaliatory response from Beijing is to be expected.

And, of course, the uncertainties surrounding Trump's possible re-election, with his threats to overhaul trade relations, cannot be overlooked.

Why does it matter to investors?

Slowing disinflationary trends pose a challenge for bondholders. If ECB members adopt a tighter stance on rate cuts, government bond prices could plummet again.

Prolonged high rates pose a risk of higher costs for companies and, consequently, an increase in bankruptcies, affecting the bloc's overall economy.

Not surprisingly, in the past two weeks, yields on riskier European debt have reached levels not seen since the onset of Covid-19 and the eurozone debt crisis more than a decade ago.

Fitch Ratings predicts the region's high-yield bond default rate could rise to 4% this year from 1.7% in 2023, driven by leverage, debt maturities, and falling yields.

Final thoughts

Be aware of macroeconomic data, as something is still being determined. The same goes for geopolitics. What seems to be the baseline scenario today may be impossible tomorrow.

And, of course, keep an eye on the economic calendar to stay on top of events affecting markets and the global economy.