Headline inflation of 2.4% was in line with the forecast of economists polled by Reuters. Every month, the ratio was at 0.6%. It is the seventh straight month the headline rate has been below 3%, despite a slight rebound in the rate in December 2023 due to energy prices.

As long as wage/price developments don’t come as a nasty surprise and data stay on course with the bank’s previous round of projections from March 2024, the European Central Bank virtually guaranteed a rate cut on June 6.

Data from Eurostat, the EU’s statistics agency, revealed that core inflation, which removes volatile prices for food, energy, tobacco, and alcohol, decreased to 2.7% from 2.9%. Policymakers use core inflation as a key indicator to assess how long price pressures will last.

Closely watched services inflation has eased to 3.7%, after remaining stagnant at 4% since the year’s beginning. The impact of a lower year-on-year price of energy continued to moderate, coming in at -0.6% versus -1.8% in March. However, policymakers express concern about the rapid wage growth that drives up service costs, and much of this can be attributed to Easter falling early.

Price increases in services, a key watcher for the European Central Bank, cooled to 3.7% from 4%. The region’s GDP, meanwhile, rose by 0.3% over the first three months of 2024, slightly better than consensus economist expectations. GDP for the fourth quarter of 2023 was revised from no growth to a 0.1% contraction, which means that the eurozone was in a technical recession in the second half of last year.

The talk of possible rate cuts has dominated the agenda for months as a result of inflation declining more quickly in the past year than the European Central Bank had anticipated. However, policymakers say they are still looking for more reassuring data, especially on wages.

Market expectation, however, is mounting for the ECB to start cutting interest rates at its next monetary policy meeting on June 6. Money market pricing currently indicates a nearly 70% probability of a June trim, according to LSEG (London Stock Exchange Group) data, with even higher bets on a cut in July or September of this year.

A host of voting ECB members told CNBC that they were anticipating an interest rate reduction in June, citing the need to prevent an excessive slowdown in the European economy. They also flagged risks from oil prices and geopolitical volatilities in the Middle East.

“The fact that services inflation fell for the first time in six months, serves as a more important development that increases our confidence that the ECB will lower policy rates in June,” Gerardo Martinez, Europe economist at BNP Paribas, told CNBC.

However, he also noted the slightly lower-than-expected fall in core inflation and volatility in some areas of services that had increased the inflation rates in France and Italy.

“With the path from here likely to be bumpy and growth data showing that the eurozone economy is gathering momentum, we think the path beyond June remains more uncertain and we continue to expect a gradual and cautious (quarterly) pace of easing from the ECB,” Martinez remarked.

Jane Foley, head of FX strategy at Rabobank, told CNBC that growth figures were encouraging, and that firmer than expected core inflation “may suggest less urgent need for more accommodative monetary policy from the ECB.”

“While a June rate cut is considered by many market participants to be almost a done deal, there is still plenty room for debate about the pace of ECB policy moves later in the year,” Foley added.

In 2022 and 2023, the European Central Bank increased interest rates at the fastest rate ever recorded in order to curb uncontrollably rising prices. However, since September, the ECB has maintained the 4% deposit rate, citing that it has taken all necessary steps to curb demand and eliminate price pressures.

Even so, some officials seem to be retracting their earlier remarks that a series of actions should follow the June cut because inflation was already well on its way to reaching the 2% target by the end of 2025.

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How it all began

That China and USA have been at the helm of economic domination is no secret. China is a manufacturing behemoth – sometimes referred to as the world’s factory. It has been a supremely attractive manufacturing destination for decades now, with low labour costs, strong infrastructure and a technically sound workforce. Despite profit margins slipping in recent times, manufacturing remains China’s mainstay and accounted for 42.6% of the nation’s GDP in 2014, stated a report in Asialink Business. A report in The Economist highlighted how China’s manufacturing strength alone can help retain its position as an economic behemoth, even while oversupply of real estate and rising debts hinder its overall growth prospects.

On the other end of the world, US President Donald Trump vowed to bring back manufacturing jobs to the USA. In April 2017, he directed the Department of Commerce to investigate the imports of steel from China and other nations could be a threat to national security. In August 2017, he asked US trade representative Robert Lighthizer to scrutinise China’s unfair trade practices, specifically looking into Chinese theft of US intellectual property following reports of IP theft by China costing the USA nearly US$225bn to US$600bn each year, reports CNN Money.

This year began on a retaliatory note for Trump and his Chinese counterpart Xi Jinping when the US government announced a 30% tariff on imported solar panels – most of which come from China – and taxes on residential washing machines. In February, the US Commerce Department headed by Wilbur Ross proposed a 24% tariff on steel and 7.7% tariff on aluminium – stoking deep concerns of a full blown trade war between the two nations. China responded sternly that it would take “necessary measures to defend our rights” if hit with tariffs. In March, Trump went ahead with the Commerce Department’s proposals by imposing 25% tariff on steel imports and 10% on aluminium imports. The following month, China retaliated by imposing tariffs worth US$3bn, including a 15% duty on 120 American products like fruits, nuts, wine, and steel pipes, and 25% tax on recycled aluminium and pork. The government specifically mentions that the tariffs are in response to the US’ trade measures against steel and aluminium. Within a day, Trump hit back with a 25% tariff on nearly 1,300 Chinese goods from the aerospace, machinery and medical industries. In response, China slapped tariffs of nearly 25% on a range of products from the US, including aircraft, automobiles, soybeans and chemicals worth nearly US$50bn. Finally, on April 5, 2018 – a year after the first round of tensions between the nations openly surfaced – the US trains its gun on another US$100bn worth of Chinese goods.

In the past two months, US stocks have risen and tumbled a fair amount. Ever since the tariffs were announced, equity prices and Treasury yields have plunged. However, markets rallied following reports of both nations striving to ease concerns over a trade war, and the two sides are keen to reconcile.

Who Gets Affected

The ongoing tussle between the two nations has already begun impacting a few sectors heavily. China said it would charge imports of sorghum, shipped from the US. Sorghum is a popular livestock feed and is used to make liquor. A report in CNN Money stated that Chinese customs officers will charge importers a fee of 179% on US sorghum after an investigation found that shipments were unfairly subsidized and were damaging Chinese producers. China happens to be the largest buyer of American sorghum, purchasing imports worth nearly US$1bn last year.

This has adversely affected American sorghum farmers, especially in Texas and Kansas, which happen to be strong support centres for the President.

One of China’s largest tech companies ZTE was the latest casualty in the trade battle. The Department of Commerce banned American companies from selling parts and services to ZTE for seven years – this is after the company illegally shipped equipment to Iran and North Korea – both nations that the US has had political fallouts with. ZTE is the fourth largest smartphone supplier in the US, and buys microchips from Qualcomm and glass from Corning. Other American brands like Apple and Amazon could be affected in the coming weeks.

Chief market strategist at FXTM Hussain Sayed stated that President Trump might be looking to focus on currencies to further influence his trade battle. A report in Wall Street Journal stated that US trade representatives are considering fresh retaliatory measures against Beijing for restrictions on American tech and cloud services.

A report from Rabobank states that India might face some unexpected hits from the ongoing trade war between USA and China as well as the US Federal Reserve’s monetary tightening cycle. The study indicates that a tariff war could reduce exports and lead to imported inflation, hurting Indian investments and purchasing capacity. Economists Hugo Erken, Raphie Hayat and Marjin Heijmerikx state three scenarios how India could be hit:

• China targets Indian exports as the nation is considered a US ally.
• If India chooses not to side with Trump, the USA has a go at Indian exports
• India could retaliate against the USA – this could cost the Indian economy dearly, they believe.

The tightening of US monetary policy could lead to capital outflows, and Rabobank models estimate India losing US$22bn in capital flows by 2022, and the rupee depreciating sharply. An unlikely benefactor of this trade face-off could be Elon Musk. The creator of Tesla, it appears, could gain some advantage after Beijing’s plans of starting energy vehicles. Tesla’s revenue in China doubled to US$2bn despite hefty import tariffs, stated a Reuters report.

Ultimately, several nations could be affected in this trade tussle, given the number of countries that trade with USA and China. A report in Financial Times states that a full-fledged trade war, although unlikely, could have a negative effect of 1 to 3 percentage points in the next few years to global GDP. It remains to be seen how the nations resolve the issue and ensure there are no massive implications on global economy.

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