S&P Global's Composite PMI for the euro area eased to 51.9 in October from 53.1 a month earlier, still signaling growth but undershooting the 52.7 economists had penciled in. The gauge remains above the 50 mark that separates expansion from contraction.
S&P Global Market Intelligence's chief business economist Chris Williamson remarked, "A key drag on growth was a renewed drop in business activity in the French service sector," and said it "may be linked to strikes and unrest having disrupted some local economies." Even so, he called the region's October activity "among some of the best performances seen over the past three years."
France underperformed by a wide margin as it contends with fiscal and political tensions. By contrast, Germany posted a fourth consecutive month above 50, helped by manufacturers doing better than anticipated.
Costs are flaring again. Williamson noted that input prices are rising sharply, prompting firms to lift selling prices to protect margins. "The picture of sustained growth and stubbornly elevated inflation from the October flash PMI will likely add to further speculation of more aggressive policy tightening from the ECB," he said. He also said that higher borrowing costs are already curbing demand.
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Although the euro-area economy has coped with the Iran war and higher energy bills, the pairing of those shocks with above-target inflation led the European Central Bank to hike rates two times and to indicate that additional tightening could still be on the table. Even so, the ongoing conflict in the Middle East and a recent jump in bond yields are seen as potential drags on activity.
Most observers anticipate no change to borrowing costs next week. Bloomberg Economics' David Powell said, "The composite PMI survey for the euro area suggests the bloc's economy is beginning to weaken under the weight of higher commodity prices and tighter financial conditions. We think that double whammy will almost certainly cause the ECB to leave rates unchanged in October and end the hiking cycle after one final increase in December."
Some investors and economists see a risk that the selloff in French bonds morphs into another euro-area debt crisis. Franklin Templeton's fixed-income investment chief warned on Wednesday that it might prove more severe than the episode over a decade ago.
PMIs land early each month and often flag turning points. They capture how widespread output moves are more than how big they are, which means business surveys can be tricky to map neatly to quarterly GDP. The bottom line: growth is still positive but slower, inflation pressures are sticky, and policy is tight and likely on pause near term. Keep an eye on French spreads, energy costs, and the ECB's tone - they are setting the near-term risk-reward in euro-area assets.
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