Will the ECB be forced to follow the Fed?

Central banks seem to have got things round the wrong way. The Eurozone economy is faltering, as today’s PMI data for September highlights, yet it’s the Fed that’s cutting interest rates by 50bps, while the ECB remains on a more cautious rate-cutting path. However, the September PMI data could add some urgency to ECB rate cuts for the rest of this year.

PMI data for France and Germany was weak across the board, with surprise declines in the service sector, on top of more weakness in manufacturing sentiment. In Germany, the average composite PMI for the last three months is 48.3, which is below the average for April – June of 51.1. This significantly increases the chance of a recession in Germany. Growth in Q3 for Europe’s largest economy is now likely to be worse than the -0.1% decline in GDP recorded for Q2. The German yield curve dis-inverted, as 2-year yields fell faster than 10-year yields, in a sign that the investors are concerned about the outlook for the European economy. It is also a sign that the market believes that the ECB will have to cut interest rates at a faster pace than initially thought.