ECB Insight: Markets Too Quick to Think Latest PMI Data Translate to 50BP Rate Cut

25 November 2024

By David Barwick and Marta Vilar – FRANKFURT (Econostream) - Like a leg straightening at the blow of a reflex hammer, markets reacted to Friday’s euro area PMI data by assuming that the stage was finally set for the European Central Bank to cut by 50bp next month. We think they are – yet again - assuming too much.

To be sure, weak data make a larger rate move on 12 December likelier, and weak the data were. The composite PMI, previously held above 50 by strength in services, fell to 48.1 as the reading for services also subsided to below that key threshold, coming in at 49.2.

But likelier isn’t the same as likely, and the new information probably doesn’t rise to the level of weakness needed to get a relatively large move.

The data still being quite fresh, we don’t pretend to have managed to conduct a survey of ECB Governing Council members showing them unimpressed by the latest evidence of anaemic activity.

One relatively dovish governor we did speak to since Friday morning merely said that the newest data confirmed the need for looser monetary policy, but was clearly far from regarding the PMIs as a game-changer.

Several Council members have however spoken publicly since the release, with all declining to treat the PMIs as an argument for larger rate cuts even when invited to do so.

At the European Banking Congress, Bundesbank President Joachim Nagel said simply that ‘these PMI numbers were not a surprise to me, they were confirming the picture that German economy is stagnating this year.’

‘The start of next year will be complicated for sure’, he added, reminding yet again that euro area inflation could soon become collateral damage in a Donald Trump trade war.

In opening remarks just previously, Nagel had warned that tariffs being bandied about by the US president-elect ‘would probably lead to rising inflation rates - on both sides of the Atlantic.’

Sitting beside him, Banque de France Governor François Villeroy de Galhau - who Econostream has repeatedly been told is at the forefront of those pushing for more easing - played down the new data.

The PMIs were of least significance among the three main indicators of growth to which his institution paid attention, he said. The central bank’s own business survey suggested ‘more resilience’ of the French economy, he said.

In his prepared remarks shortly prior, Villeroy had also said that the ECB was ‘not behind the curve today’.

Meanwhile, arch-dove Banco de Portugal Governor Mário Centeno told Bloomberg on Friday that his preference was to move ‘gradually’ with interest rates, meaning in ‘steady and predictable’ increments.

That was hardly a plea for a change of pace. True, Centeno did say that ‘we can certainly discuss and be open to different steps’ if the materialisation of downside growth risks is confirmed. That is nothing new coming from him, however; he was particularly open to a 50bp cut well before Friday, and events don’t seem to have materially altered his view.

Perhaps Central Bank of Ireland Governor Gabriel Makhlouf, not known for hawkishness, expressed it best. A week ago, he said in response to a question about his willingness to entertain a relatively large rate move on 12 December that ‘it would take … quite some persuading for me to sort of “leap”.’

‘The evidence would have to be pretty overwhelming’, he continued. ‘And at the moment … I am still a believer in a prudent and cautious approach.’

Were the PMI data dismal? Yes. Overwhelming? Probably not. And probably it would take more for the ECB to switch into overdrive. What policymakers have been saying suggests they take a similar view.

Speaking to Econostream on background hours before the PMI data were released, one governor said that developments had been largely consistent with the ECB’s forecasts, that the inflation outlook would only become significantly clearer next March, and that December’s projections would ‘unfortunately’ leave a lot of questions unanswered.

Advocating ‘small steps for the time being’, this Council member did not rule out a 50bp cut, but insisted that it would require that monetary authorities ‘clearly see inflation going and staying below the target, or the economy moving into recession’. That was not the current baseline and he didn’t ‘see it happening’, he maintained.

Almost three weeks remain to the next monetary policy meeting. Following mixed Ifo German business confidence this morning, the EU Commission will publish euro area business and consumer confidence on Thursday and Eurostat will release flash November inflation data on Friday.

In addition to data that will be public before the Council convenes, the ECB will produce a new set of macroeconomic forecasts that will contribute heavily to the decision.

It would therefore be audacious to rule out any outcome, including a 50bp cut. But in that specific regard, Friday’s PMIs haven’t done the trick.