Markets bet against September ECB rate rise as euro-zone downturn quickens

Markets are now betting against a further rise in European Central Bank interest rates next month after the contraction of private-sector activity in the euro zone intensified. Services ceased being a bright spot and followed the industrial sector into a downturn.

Worse-than-expected numbers from the region’s two top economies brought warnings that output in the 20-nation bloc will shrink this quarter.

The flash purchasing managers’ index for the region fell to 47, further below the 50 threshold indicating growth. Services activity shrank for the first time since the end of 2022 at a time when the expectation had been for continued expansion in a sector that had until recently seen robust demand.

The figures were particularly dire in Germany, where overall activity declined at the fastest pace since the first wave of the pandemic brought the economy to a screeching halt in May 2020. France reported a third monthly drop in output, while the rest of the region contracted more moderately.

The report comes at a crucial moment for the ECB, which is undecided whether it will raise rates for a 10th straight time in September or refrain from doing so.

After the German data was published, traders aggressively pared rate wagers and now see a 40 per cent chance of a further quarter-point hike from the ECB, in September compared with 80 per cent earlier.

“It strengthens the hands of those arguing for a pause in September,” said Dirk Schumacher, an economist at Natixis. “The economy is clearly not doing well given these figures.”

“The service sector of the euro zone is unfortunately showing signs of turning down to match the poor performance of manufacturing,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said in a statement. “Service companies reported shrinking activity for the first time since the end of last year, while output in manufacturing dropped again.”

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The figures indicate that the euro-zone economy will shrink by 0.2 per cent in the third quarter, compared with 0.3 per cent growth in the three months to the end of June, he said.

While slowing activity should support a pause, the PMI report released by S&P Global on Wednesday also came with a warning over stubborn price pressures.

“ECB president Christine Lagarde sounded the alarm that the economy may be faced with higher wages and lower productivity, leading to higher inflation,” de la Rubia said. “It seems like those worries are about to turn into reality, at least for the vast service sector.”

There were also signs that the labour market, which has so far remained resilient against worsening economic prospects, is starting to feel the pinch. Hiring nearly stalled as companies confronted a gloomier outlook for the year ahead, S&P Global said.

Business confidence fell, largely driven by lower backlogs of work. Companies also cited concerns “over broader economic slowdowns at home and in export markets,” the report said.

Data for the UK showed private-sector firms suffered their first contraction in seven months, revealing the growing economic toll of higher interest rates and the squeeze on households. Earlier numbers from Australia pointed to a deepening slump, while a measure for Japan showed solid growth. Figures from the US are predicted to show stable growth. – Bloomberg