Growth Resilience Meets Policy Shift
Monday, November 04, 2024 (Week 44)
The European Central Bank's decision to cut its three key interest rates by 25 basis points on October 24th marked its third consecutive reduction this year, bringing the deposit facility rate to 3.25%. This move, following similar cuts in September and June, reflects the central bank's growing confidence in controlling inflation, which hit the 2% target in October for the first time since April 2021.
The 20-nation currency union demonstrates mixed economic signals. GDP expanded 0.4% in Q3 2024, doubling Q2's 0.2% growth and exceeding market forecasts of 0.2%, according to Eurostat data. However, the HCOB Flash Eurozone Composite PMI at 49.7 in October indicates ongoing contraction in private sector activity, primarily driven by manufacturing weakness.
Inflation's return to target comes amid significant price pressure easing. The October flash reading showed annual inflation at 2%, up from September's 1.7%, while core inflation held steady at 2.7%. Energy costs fell 4.6% year-over-year, moderating from September's 6.1% decline, while food, alcohol, and tobacco prices accelerated to 2.9%.
Bullish Euro Factors
GDP growth doubled to 0.4% in Q3 from 0.2% in Q2, surpassing 0.2% consensus
October inflation at ECB's 2% target suggests reduced pressure for aggressive easing
Consumer confidence improved to -12.5, the highest since February 2022
Economic sentiment indicator at 95.6, showing resilience despite challenges
Bearish Euro Factors
Manufacturing PMI at 45.9 in October indicates continued sector contraction
Services PMI declined to 51.2 from 51.4, showing slowing expansion
ECB signalled readiness for further rate cuts with October's 25 bp reduction
Private sector employment declining at fastest pace in almost four years
Financial Markets Analysis
European financial markets reflect the complex interplay between monetary policy adjustments and economic data. The STOXX 50 experienced significant volatility in October's final week, falling 1.3% to 4,821 on October 31st before rebounding 0.2% in subsequent trading. The broader STOXX 600 followed a similar pattern, with both indices responding to the ECB's rate decision and inflation data.
Stock Market Developments
October's equity market performance highlighted sectoral divergences. Luxury goods companies faced particular pressure, with sector leaders experiencing notable declines on October 30th - LVMH, Hermès, and Kering saw drops between 1.3% and 3.2%. The weakness stemmed from underwhelming earnings reports, notably Moncler's revenue decline in Q3, and growing concerns about Asian market demand.
Bond Market Analysis
German government bond yields responded significantly to October's economic data releases. The yields fell following PMI data showing continued business activity decline, with the composite index at 49.7. This movement reflected growing market conviction about continued ECB easing, with traders now fully pricing in a 25 basis point cut for December's meeting, according to market data.
Commodity Market Impact
European natural gas futures demonstrated notable price moderation, falling below €39.4 per megawatt-hour by October 29th. This represents a significant retreat from the October 25th peak of €43.6, providing potential relief for inflation pressures. The price stabilisation occurred despite ongoing Middle East tensions, suggesting improved market confidence in European energy security.
Economic Analysis
The Euro Area economy shows divergent sector performance amid shifting monetary conditions. The ECB's latest projections maintain 0.8% growth expectations for 2024, though recent data presents a mixed picture of regional economic health.
GDP Performance
Third-quarter GDP growth of 0.4% marked the strongest expansion in two years, according to Eurostat data. This performance reflected varied regional dynamics:
France: Growth accelerated to 0.4% from Q2's 0.2%
Spain: Maintained robust 0.8% expansion
Germany: Returned to growth at 0.2% after Q2's 0.3% contraction
Italy: Growth stalled following Q2's 0.2% expansion
Inflation Trends
October's inflation data revealed complex price dynamics:
Headline inflation: Rose to 2.0% from September's 1.7%
Core inflation: Steady at 2.7%, above forecasts of 2.6%
Energy costs: -4.6% year-over-year, moderating from September's -6.1%
Food, alcohol, tobacco: Accelerated to 2.9% from 2.4%
Services: Maintained 3.9% growth rate
Labor Market Status
The unemployment rate for September held at 6.3%, maintaining its record low level according to Eurostat data. However, PMI surveys indicate private sector employment declined at the fastest rate in nearly four years, suggesting potential labour market softening ahead.
Consumer Sentiment Indicators
October's economic data showed divergent confidence trends:
Economic sentiment: Declined to 95.6 from 96.3, lowest since February
Consumer confidence: Improved to -12.5, best level since February 2022
Industry confidence: Deteriorated to -13 from -11, worst in over two years
Services confidence: Held steady at 7.1
Key Economic Calendar
November brings crucial data releases:
November 6: Final Services PMI
November 7: Retail Sales (September)
November 14: GDP Second Estimate Q3
November 17: Final October Inflation
November 22: Flash PMIs
November 29: Flash Inflation (November)
Monetary Policy Analysis
The ECB's monetary policy stance has shifted notably following its October 24th meeting. The Governing Council, led by President Christine Lagarde, implemented its third consecutive rate cut, bringing key rates to:
Deposit facility: 3.25%
Main refinancing operations: 3.40%
Marginal lending facility: 3.65%
The central bank's decision reflects confidence in disinflation progress, with September marking the first sub-2% reading in over three years. Market expectations, derived from swap contracts, indicate further easing through 2025, with rates projected to reach 2% by mid-2025.
Geopolitical Context
Economic policy decisions occur against a backdrop of regional challenges. The ongoing Middle East conflict has introduced uncertainty into energy markets, though its impact on European gas prices has moderated, with prices retreating from October highs. The ECB's latest policy decisions suggest growing confidence in managing external shocks while maintaining price stability.
Currency Analysis
The euro demonstrated resilience in late October, appreciating to $1.087 on October 31st, reaching a two-week high. This movement occurred despite the ECB's rate cut, suggesting markets had largely priced in the monetary policy adjustment. Trading volumes and currency pairs data indicate sustained institutional interest in euro-denominated assets.
Conclusion
The Euro Area presents a complex economic picture characterised by:
Above-consensus GDP growth amid sector divergence
Inflation at target but with persistent core price pressures
Labour market stability despite PMI employment warnings
Continued monetary policy easing with market pricing further cuts
Key Trader Considerations:
Monitor services PMI data for signs of spillover from manufacturing weakness
Watch core inflation trends as key determinant of ECB policy path
Track German economic indicators as regional growth driver
Risk Factors:
PMI data suggesting continued private sector contraction
Core inflation persistence above target
Labour market deterioration signals in forward indicators
Sources
European Central Bank Statistical Database, Eurostat Economic Indicators, S&P Global PMI Reports, Trading Economics Data Platform, ECB Policy Statements and Minutes