Euro macro: Eurozone composite PMI remained unchanged at 49.7 in October (49.6 in August). It is slightly below the neutral level, indicating a slight decline in business activity in the euro area at the beginning of the fourth quarter. This was in line with our and consensus expectations. Weak domestic demand is the main reason for the weak business momentum, as there are new signs that the eurozone's economic recovery is slowing.
Looking at the subcomponents the link between economic performance and the inflation outlook are becoming more clear. First, weak demand in recent months is forcing companies to restructure, reducing labour demand. Indeed, the employment subcomponent fell further to 49.1, from 49.7. Second, weak demand also makes it less straight-forward for companies to pass on price rises to consumers. As a result, the PMI subcomponent for output prices increased at the slowest pace since the start of 2021. Both subcomponents bode well for the further disinflationary process, but signal a weak growth environment.
The eurozone manufacturing sector stayed in contractionary territory at 45.9, but increased on a monthly basis (45 in August). This monthly increase seems to be driven by the German industrial sector which recouped some of the losses from Q3. German factory order data confirm lacklustre demand as a reason for continued industrial sector weakness. Where international orders have started to recover slightly over the course of Q3, German domestic orders as well as Euro area orders remain left behind.
At 51.2 the eurozone services sector remains a bright spot for the economy but the pace of expansion is moderating clearly. This moderation in services sector output is led by France, where the sector noted a second consecutive monthly contraction in activity. In France, the PMI report points towards political uncertainty, for instance over budget proceedings, as a factor. Further reason for the eurozone-wide moderation in services sector activity could be softening labour markets as well as knock-on effects from industrial weakness leading to falling demand for business related services.
ECB: Door opened to a 50bp cut in December but we stick with 25bp for now – For the ECB, today’s PMI report is the first major data point before the December meeting with Q3 GDP figures, 2 inflation reports and another PMI report still to come. Since the October meeting, Governing Council members have signalled openness to accelerate the pace of rate cuts to 50bp – instead of 25bp – because of economic downside surprises affecting the inflation outlook. In our view, while the need for less restrictive monetary policy is clear, today’s PMIs do not yet suggest a sufficient deterioration in economic conditions to warrant such a step-up to 50bp cuts. As a result we stick to our call of a 25bp rate cut at the December meeting.
