Eurozone PMI hits 41-month high, bolstering case for ECB October rate hike

Eurozone business activity surged to its highest level in more than three years in September, defying headwinds from rising energy prices and geopolitical uncertainty while strengthening the case for another European Central Bank interest rate increase as soon as October.

The flash composite purchasing managers' index published by S&P Global ↗ 1.01% on Wednesday climbed to 53.1 from 52.0 in August, marking a 41-month high and the third consecutive month of expansion. The reading came in well above economists' expectations of 51.7.investinglive+2

Services Drive the Surprise

The jump was led by the services sector, where the business activity index rose to 53.0 from 51.6 in August, a 10-month high. Manufacturing output edged up to 53.4 from 53.3, reaching a 55-month high, while the headline manufacturing PMI held steady at 52.7.tradingview+2

Growth was broad-based across the region. Germany expanded for a third straight month at its fastest pace in nearly a year, with services activity jumping from 49.7 to 52.9. France recorded its first increase in activity in 10 months. New orders grew at the strongest pace since May 2022, and export orders rose for a second month after 53 months of consecutive declines.investing+1

Inflation Pressures and the ECB

The data also carried a less comfortable signal for policymakers. Inflationary pressures intensified, with both input costs and output prices rising at their sharpest rates in four months across manufacturing, services, and all major eurozone economies. The ECB had already raised interest rates this month for the second time this year amid renewed Middle East tensions and climbing energy costs.economictimes+2

"The resilience of economic growth amid the headwinds of geopolitical issues and rising prices will likely embolden the ECB to hike interest rates again before the end of the year, adding to the case for rates to rise sooner rather than later to put an October hike very much on the table," said Chris Williamson, chief business economist at S&P Global Market Intelligence. He noted the PMI data points to GDP rising at a quarterly rate of 0.4%.fxstreet+1

Too Good to Be True?

Market pricing for a 25-basis-point rate hike in October rose to around 48%, up from roughly 45% before the data. ING economists struck a cautious note, calling the readings "almost too good to be true" and warning that a eurozone economy completely unharmed by an energy price shock and supply chain disruptions could turn out to be "a mirage". Business confidence in the year-ahead outlook, meanwhile, eased to a three-month low.investing+2

The EUR/USD pair fell 0.3% following the release, as traders weighed the prospect of tighter monetary policy against broader global pressures.fxstreet