Markets
Eurozone business activity continued to rise in September, with the composite PMI reaching a 16-month high at 51.2 (from 51 in August). Details couldn’t convince though. New orders and employment stalled while business confidence dropped to a 4-month low. Declining orders and job cuts in manufacturing were balanced by modest expansions in services. Companies often used the clearance of outstanding business to support output growth with work-in-hand now depleting on a monthly basis for the past two-and-a-half years. The manufacturing PMI dipped back into recessionary territory (49.5 from 50.7) after staying north of the 50 boom/bust mark for only the first month since the post-Covid recovery. Purchasing activity, stocks of purchases and stocks of finished goods keep depleting. The EMU services PMI hit a 9-month high at 51.4 (from 50.5). Cost inflation in the services sector eased slightly but remains unusually high. Selling prices cooled more notably. On a national level, Germany was a key driver of growth in September (52.4 from 50.5), recording a solid increase in output that was the joint-fastest since May 2023. France saw activity decrease for the thirteenth consecutive month, and at the sharpest pace since April (48.4 from 49.8), as the government shake-up likely threw a wrench into companies’ production plans. The rest of the Eurozone registered continued growth of output, but the rate of expansion moderated. Today’s PMI’s perfectly fit with the ECB view to keep its deposit rate steady at 2% for the time being. They didn’t impact trading on European bond or FX markets (EUR/USD 1.18) and didn’t spoil positive risk sentiment on European stock markets (+0.5%-+1%). The steady EMU composite PMI contrasted with a significant setback in the UK PMI (51 from 53.5). The latter was “a litany of worrying news including weakening growth, slumping overseas trade, worsening business confidence (fear of Budget measures outweighing BoE rate cuts) and further steep job losses”. September data indicated another sharp increase in average cost burdens across the private sector economy. When it comes to selling prices, service sector firms recorded a solid rise in their prices while manufacturers saw a marked slowdown in factory gate inflation. The weak UK PMI triggered temporary GBP-weakness with EUR/GBP jumping from 0.8720 to 0.8745, without testing the 0.8769 YtD top.
In other news, Washington-based Fed governor Bowman ruffled her dovish feathers. She dissented in July in favour of a 25 bps rate cut and joined last week’s consensus decision. Bowman believes the Fed is seriously at risk of falling behind the curve and said it’s time for the FOMC to act “decisively and proactively to address decreasing labor market dynamisms and emerging signs of fragility. Tariffs won’t have a significant effect on inflation according to her. US markets were unnerved on the comments going into tonight’s economic outlook by Fed Chair Powell.
News & Views
The Riksbank cut the policy rate by 25 bps to 1.75%. Sweden’s central bank expects it to remain there for some time to come, provided the outlook for the economy and inflation holds. The policy rate forecast suggests no changes through 2026. The semi-unexpected (hawkish) rate cut comes with the Riksbank growing more confident that still-high inflation (CPIF 3.2%) is transitory. It referred to a decline in companies’ pricing plans and the stronger currency. The Riksbank added that the tax cuts announced by the government wouldn’t materially affect inflationary pressures apart from slowing down price rises temporarily next year. Growth meanwhile is showing signs of improving but it has been weak for a long time and the timing of the expected recovery has been pushed forward several times. With the cut, the Riksbank aims to facilitate the process. The clear end to the easing cycle is lifting the Swedish crown, pushing EUR/SEK to around 11.
The OECD in its Interim Economic Outlook Report forecasts a 3.2% global expansion this year (up from 2.9% in June. The organization said the economy proved more resilient to tariffs than anticipated, adding, however, that the full impact of the increases has yet to be felt. The 2026 outlook stood unchanged at 2.9%. Among the largest countries, US growth was beefed up to 1.8% (+0.2 ppts) for this year with the 2026 forecast left at 1.5%. A 0.2 ppts bump to 1.2% for this year in the EMU came with a same-sized downward revision for the next (1%). UK activity should end up the second-highest in the G7 (1.4% in 2025) but the country is suffering from the highest inflation rate. The 3.5% for 2025 would ease to 2.7% next year. This compares to 2.7%-3% for the US and 2.1%-1.9% for the EMU.
. Details couldn’t convince though. New orders and employment stalled while business confidence dropped to a 4-month low. Declining orders and job cuts in manufacturing were balanced by modest expansions in services. Companies often used the clearance of outstanding business to support output growth with work-in-hand now depleting on a monthly basis for the past two-and-a-half years.){kind=link}