Euro-Area activity peaks amid German woes

PMIs show resilience as services offset German manufacturing decline, impacting ECB rate cut forecasts.

By Ahmed Azzam | @3zzamous | 22 February 2024

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  • Euro-area private sector activity at an 8-month peak.

  • German manufacturing at its lowest since last October.

  • Euro strengthens on upbeat French data.

  • Market bets on ECB cuts decrease significantly.

Euro-area private sector activity has reached its highest point in eight months, according to the latest Purchasing Managers' Index (PMI) data. The buoyancy, particularly in the services sector, has compensated for the stark downturn in German manufacturing, which has hit its lowest ebb since October. This mixed economic landscape has prompted markets to scale back expectations for European Central Bank (ECB) rate cuts to under one percentage point by year-end, marking a significant shift in investor sentiment.

Investor sentiment shifts on ECB policy outlook

Market dynamics have adjusted, with traders now betting on fewer ECB interest-rate cuts this year, the anticipation dropping to less than one percentage point. This recalibration reflects the lowest level of rate cut expectations in months. Swap contracts further underscore this trend, indicating less than four 25 basis-point reductions priced through the end of 2024, a decrease from the seven cuts anticipated at last year's close. Concurrently, the probability of an initial rate cut in April has been pared down to 30%, with market consensus now expecting the first reduction in June.

Euro's rally amid revised easing prospects

The reassessment of central bank easing prospects was sparked by French services and manufacturing data surpassing economists' forecasts, signaling enduring economic resilience within the euro zone. This resilience has led investors to reevaluate the expected degree of monetary policy accommodation from major central banks. Following these developments, the euro experienced a notable uptick, climbing as much as 0.6% to 1.0888 — its strongest level since February 2 — before moderating to around 1.0850 in response to further data indicating an intensified manufacturing downturn in Germany.

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