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The euro hit a new record low today, confirming that eurozone business activity contracted towards the end of the third quarter. A temporary recovery in France in August was a major factor, but overall conditions in manufacturing continue to deteriorate and services activity is beginning to slow. Eurozone bond yields also fell on the day, with the 10-year German Bund yield falling 3 basis points to 2.16%.
Inflationary pressures will weaken generally in September, increasing pressure on the ECB: Input cost inflation slowed sharply, falling to its lowest level since November 2020.
As the HCOB points out:
“The eurozone is heading for stagnation. After the Olympics gave a temporary boost to the eurozone’s main economy, France, the composite PMI recorded its biggest fall in 15 months in September. The index is now below the expansion threshold. Given the sharp declines in new orders and backlogs, it is easy to imagine the economy weakening further.
“Manufacturing is becoming more disrupted with each passing month. The recession has now lasted 27 months and worsened in September. Looking ahead, a sharp decline in new orders and an increasingly gloomy outlook for business production suggest that this downturn is far from over.
“The manufacturing labour market is feeling the strain, with employers shedding staff at their fastest pace since August 2020. At the same time, service sector job growth has slowed for four consecutive months and is now roughly stable. Official euro area employment data, which has been stable thus far, is expected to worsen in the coming months, although demographic trends should make it more stable than in previous downturns.”
“The ECB is closely monitoring persistently elevated service sector inflation, so news that both input and output price inflation have moderated is certainly welcome. Moreover, given the deepening manufacturing slump and the near stagnant services sector, further rate cuts are quite likely in October, although markets are not yet expecting them.”
