Eurozone Services PMI Falls, Raising ECB Rate Cut Bets Amid Economic Weakness

Eurozone Services PMI, Economic Woes, and ECB Rate Cut Bets

On Thursday, October 3, the Euro Area PMIs sent fresh signals of economic challenges. These signals could raise expectations of a more dovish European Central Bank (ECB) rate path.

Eurozone Services PMI Highlights Economic Weakness

The Eurozone’s HCOB Services PMI declined from 52.9 in August to a 7-month low of 51.4 in September, up from a flash estimate of 50.5.

According to the PMI Survey,

• Demand for services declined for the first time since February.
• Employment levels rose further but were weaker than the long-run average since records began in 1998.
• Services inflation softened across the services sector. Input costs and output prices were the softest in 42 and 41 months, respectively.
• Business confidence improved but remained subdued compared to historical levels.

Germany Lags Behind in the Euro Area the Composite PMI Table

Germany, once the Eurozone’s economic powerhouse, found itself at the foot of the Composite PMI table, highlighting its economic struggles.

Germany’s Composite PMI Index fell to a 7-month low of 47.5, while Spain’s Composite PMI increased to a 4-month high of 56.3 in September.

ECB Is Dependent on Data

September’s PMI could add to speculation about a possible October ECB rate cut. The services sector has been a key driver of inflation. Waning service sector activity, the downward trend in prices, and the Eurozone’s recent inflation figures align with rising hopes of further ECB monetary policy easing.

Expert Views on the Eurozone Services Sector and ECB Rate Path

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

“The situation in the service sector in the eurozone will continue to deteriorate. This is indicated by the decline in new business. For the first time since February, it has fallen in the eurozone compared to the previous month. The development in Germany and France is similar. Factoring in the ongoing contraction in industry, the eurozone economy is likely to have grown only at a marginal rate in the third quarter. Our GDP nowcast model, which takes into account the PMI indicators, also points to only minimal growth.”

EUR/USD Reaction to Services Sector PMIs

Before the service sector PMIs, the EUR/USD climbed to a high of $1.10489 before falling to a low of $1.10244.

However, in response to the Euro area member state and Eurozone PMIs, the EUR/USD rose to a high of $1.10395 before falling to a low of $1.10271.

On Thursday, October 3, the EUR/USD was down 0.07% to $1.10366.

Looking Ahead: Eurozone Producer Prices in Focus

Next, investors should focus on Eurozone produce prices that are out later in the European session. Economists expect producer prices to decline by 2.4% year-on-year in August, following a 2.1% drop in July.

A more marked decline could signal weakening demand. Producers tend to lower prices in a softer demand environment, possibly reducing consumer prices. As a leading indicator for inflation, weaker-than-expected figures could further bolster expectations for an October ECB rate cut.

US Economic Data to Influence Market Sentiment

Later in the session on Thursday, US jobless claims and the crucial ISM Services PMIs will likely influence sentiment toward the Fed rate path.

Higher-than-expected jobless claims and waning service sector activity may refuel expectations of a 50-basis point November Fed rate cut.