Eurozone Services PMI Drops in October, Signaling a 25bps December ECB Rate Cut

Eurozone Services PMI Tests Dovish Rate Cut Bets

On Thursday, October 24, Euro Area Services PMIs influenced expectations for a December ECB rate cut as the services sector remained the main contributor to inflation.

The HCOB Eurozone Services PMI declined from 51.4 in September to an 8-month low of 51.2 in October. According to the Flash PMI Survey,

• Demand for services fell for the second consecutive month in October.
• New orders fell at the sharpest pace for nine months.
• Employment stagnated across the services sector.
• Input prices in the services sector continued to rise sharply, though at a slower pace than the series average.
• However, output prices across the services sector trended higher, offsetting falling prices across the manufacturing sector.
• Business confidence weakened but remained stronger than sentiment across the manufacturing sector.

Germany’s Private Sector Faces Ongoing Contraction

Germany, previously the Eurozone’s economic engine, continued to face challenges. The HCOB Composite PMI increased from 47.5 in September to 48.4 in October. The services sector showed signs of improvement as the HCOB Services PMI climbed from 50.6 in September to 51.4 in October.

ECB Rate Decision Remains Data-Dependent

While PMI figures may temper speculation of a large rate cut, persistent price increases in the services sector could still fuel inflationary pressures. Upward trends in service sector prices could drive domestic inflationary pressures. However, the data will likely continue supporting bets on a smaller, 25-basis point December rate cut.

Expert Views on the Eurozone Services Sector and ECB Rate Path

Hamburg Commercial Bank Chief Economist Dr. Cyrus de la Rubia remarked on the PMI data, saying,

“For the European Central Bank (ECB), the latest figures come with an unwelcome surprise. Inflation in the services sector seems likely to stay elevated, as costs and selling prices in October rose faster than the previous month. This is probably due to persistent wage pressure, which impacts service providers especially hard.”

Dr. Cyrus de la Rubia concluded,

“All this backs the idea that the ECB is likely to cut key interest rates by just 25 basis points in December, rather than the 50 basis points some have been talking about.”

EUR/USD Reaction to Services Sector PMIs

Before the private sector PMIs, the EUR/USD climbed to a high of $1.07933 before falling to a pre-data low of $1.07702.

However, in response to the Euro area PMI figures, the EUR/USD rose from $1.07726 to $1.08045.

On Thursday, October 24, the EUR/USD was up 0.15% to $1.07972, signaling expectations of a smaller 25-basis point December ECB rate cut.