Inflation is back below the 2% target

Danske Research Team Danske Bank A/S

Growth momentum slowed in September, with the composite PMI falling to 49.6 from 51.0 in August. The services PMI ticked lower to 51.4 from 52.9 mainly because of the Olympic games in August, which then dragged French PMIs significantly lower in September. Overall, the service sector remains in expansionary territory but it has weakened during the past quarter due to Germany and France while Spain experiences higher activity. The manufacturing sector continues to struggle, particularly in Germany due to both local problems and a global slowdown.

The labour market has moderated recently, and the PMI employment index dipped below 50 for second month in a row (49.7 in September). The employment situation has particularly moderated in Germany and France, whereas employment growth continues to be decent in Spain, Portugal and Greece. For details, see Research euro area - Moderating labour market with downside risks, 3 October.

Inflation fell below 2% for the first time in three years to 1.8% y/y in September, as expected. The decline was mainly due to energy inflation while core inflation was stickier at 2.7% y/y (prior: 2.8%) due to high services inflation at 4.0% y/y and low goods inflation at 0.4% y/y. Importantly, momentum in services inflation declined significantly as service prices rose only 0.14% m/m s.a., which was the lowest monthly rate this year. Headline inflation has averaged 2.17% in Q3, below the expectation of 2.3% in the latest ECB projections. Combined with easing services momentum this should make the ECB more confident of inflation returning persistently to target.

As inflation has declined more than expected, the labour market is moderating, and the near-term growth outlook is weak, we have adjusted our ECB profile, now expecting an October rate cut of 25bp, and a December 2025 rate cut. Our new outlook consists of two cuts for the remainder of 2024, and four quarterly cuts next year, bringing the deposit rate to 2% in December 2025. For more details, please see COTW: October rate cute is the baseline – Why wait?, 27 September.

In France, the new Prime Minister, Michel Barnier, has formed his government, mainly from Macron's centrist alliance and his own conservatives, aiming for crossparty support in a fragmented parliament. Tackling France’s strained finances is a top priority, but no easy task with the country facing an excessive deficit procedure by the EU. To address this, Barnier’s government has proposed a €60bn budget squeeze for 2025 to curb the deficit, which is expected to reach 6.1% of GDP this year. The plan aims to reduce the deficit to 5% by year-end 2025 but only meet the EU's 3% target by 2029. Large budget deficits and likely confrontations with the EU has made investors demanding a premium for investing in French debt. In September, we saw French 10-year government yields ticking higher than Spanish for the first time since 2007 – also driven by the much more upbeat growth story and public finances in Southern Europe. For details, see Research euro area - Southern Europe to continue outperforming, 23 September.

Download The Full Euro Area Macro Monitor

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.