Eurozone stumbles as PMI data highlights growing US-EMU divergence

Markets

The PMI’s on Friday again highlighted the divergence in growth and confidence between the US and EMU. The glimmers of hope some optimists saw in the October EMU PMI reading where brutally rejected by the November update. The composite PMI tumbled back in contraction territory (48.1 from 50.0). Even more worrisome, services which until now still provided some counterweight against an ailing manufacturing sector, this time also dropped below the 50-boom-or-bust level (49.2 from 51.6). Germany and in particular France, were the main reason of the decline, but growth in the rest of the EMU is slowing as well. At the same time, rising wage costs caused input and output prices rising again, indicating Europa is heading for a stagflationary environment. The contrast with the US could hardly be bigger. The US composite PMI rose more than expected to an healthy 55.3 from 54.1, with survives taking the lead (57.0). In manufacturing, a mild contraction continues (48.8). Even more striking, in this context, the pace of US output price inflation slowed to the slowest since May 2000. In a sharp bull steepening move, German yields tumbled between 11.7 bps (2-y) and 4.4 bps (30-y). Markets now again see a 50-50% chance between a 25 bps and 50 bps ECB rate cut at the December 12 meeting. The reaction of US interest rate markets to the US PMI’s was much more modest. The US 2-y yield added 2.4 bps. The 30-y declined 1.4 bps. With markets discounting only 60% of a 25 bps Fed cut at the December Fed meeting and less than 75bps additional easing toward the end of next year, investors apparently don’t feel the need to a more hawkish positioning yet. The combination of lower EMU yields and a solid US eco performance supported equities on both sides of the Atlantic (Dow +0.97%; Eurostoxx 50 +0.70%). EUR/USD briefly spiked below the 1.035 mark immediately after the EMU data, but closed the day at 1.042. Sterling showed a similar intraday pattern, but EUR/GBP soon returned north of 0.83, as the US PMI (composite 49.9) also missed expectations by a big margin.

This morning, sentiment on Asian markets (ex China) is constructive. Markets apparently draw some comfort from Scott Bessent being Donald Trump’s candidate to become Treasury Secretary. Markets hope he will hold a marketfriendly but also a measured policy, supporting financial and macro-economic stability. US Treasuries are rebounding, with yields declining between 4.5 (2-y) and 7 bps (10-30-y). The correction (in US yields) and a constructive risk sentiment also triggers some profit taking on recent USD rally. DXY drops below the 107 barrier (compared to a test of 108 on Friday). EUR/USD also tries to fight back (1.048). Especially, for EUR/USD, we don’t anticipate a genuine turnaround, but some consolidation might be on the cards. The eco calendar contains the IFO business confidence. We also keep a close eye at ECB comments after last Friday’s PMI’s. Later this week EMU CPI data (Thursday, Friday) are important to further shape expectations on the pace of ECB easing in December.

News and views

Nationalist candidate Calin Georgescu unexpectedly won the first round of Romanian presidential elections, securing around 22% of the vote. He’s slightly ahead of Prime Minister Ciolacu who gained around 20%. Both men advance to a run-off vote on December 8. This set-up still favors Ciolacu for the ceremonial win, although the president is commander-in-chief of the military and the country’s representative at NATO and EU Summits. Georgescu has questioned military support for Ukraine, called for an end to the war, cast doubt on the benefit of Romania’s NATO-membership and labeled Russian president Putin one of the world’s few true leaders. The outcome of the presidential ballot makes way for possible surprises at general elections (December 1) triggered by a collapse of the coalition government (Social Democrats of PM Ciolacu and Liberal Party) after three years in charge.

People close to the Italian government indicated that this year’s budget deficit could be 3.9% or 4% of GDP instead of the 3.8% target. The debt ratio might be up to two percentage points above the 134.8% tabled in September. The key concern is the 1% growth forecast Rome uses is significantly above the 0.7%-0.8% taking into account by the Bank of Italy, the IMF or the EC. That’s also why the impact on debt ratio is larger than on the deficit. Italian officials estimate that every tenth of a percentage point deviation in growth equates to around €2bn in additional issuance.

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