Hope for recovery turns into a bubble! The deterioration of the German and French economies caused the Eurozone PMI to shrink for the first time in six months in September.

Due to the end of the Olympic craze in France and the deepening of the decline in manufacturing, concerns have intensified about the lack of momentum for the recovery of the region, and private sector activity in the Eurozone has shrunk for the first time since March. Data released on Monday showed that the preliminary reading of the S&P Global Eurozone Composite Purchasing Managers' Index (PMI) fell from 51 last month to 48.9 in September, below the 50 mark that indicates expansion, with analysts expecting a slight decline to 50.5. After the data was released, the yield on German two-year bonds fell below the yield on 10-year bonds, causing the difference between the yields on the two maturities to return to positive territory for the first time since November 2022, as traders bet that the European Central Bank would need to accelerate rate cuts to support the economies of the 20 countries in the Eurozone. The euro also slipped. In fact, output in the Eurozone's 20 countries has started to decline, despite consumers benefiting from cooling inflation and rising wages, they are still reluctant to spend. Weak foreign demand has also put pressure on factories. The struggles of German car manufacturers such as Volkswagen highlight this issue. The German central bank previously warned that the German economy could experience a mild recession following a string of bad news from car manufacturers. Following BMW, Mercedes-Benz also lowered its profit expectations last week. Meanwhile, Volkswagen warned that weak demand might force it to close factories in the German market. Cyrus de la Rubia, economist at Hamburg Commercial Bank, said in a statement, "The Eurozone is heading towards stagnation. Given the rapid decline in new orders and order backlogs, it is not difficult to foresee a further weakening of the economy." Some European central bank officials are increasingly concerned about weak economic growth, warning that restrictive monetary policy cannot allow the economy to stagnate for too long. Although they still say they may keep interest rates on hold at the next meeting after cutting rates for the second time in September, some say abrupt economic changes could change their minds. Currently, the money market is betting that the European Central Bank will further ease monetary policy by 44 basis points this year, with a 40% chance of a rate cut in October. Jamie Rush, Chief European Economist at Bloomberg Economics, said, "The composite PMI indicates a deteriorating economic outlook. This reflects to some extent France's return to reality after the end of the Paris Olympics. We expect the Eurozone's economy to grow by 0.2% in the third quarter, unchanged from the second quarter. A significant slowdown in growth will be unwelcome for the European Central Bank. If further evidence shows economic slowdown, this could make a rate cut in October possible." The weakness in the Eurozone is largely due to Germany, where manufacturers are facing a combination of challenges including declining global demand, increasing competition, and domestic structural issues. The German composite PMI fell more than expected, dropping from 48.4 to 47.2, the lowest level in seven months, still below the 50 mark. Factory contraction has accelerated, while the service sector is almost stagnant. De la Rubia said, "These unsettling figures may exacerbate the debate in Germany about deindustrialization risks and how the government should respond." Meanwhile, France's growth momentum has also slowed, with the rebound associated with the Olympics quickly disappearing and a sharp decline in service sector activity. France's composite PMI plummeted from 53.1 to 47.4, well below analysts' forecast of 51.5. S&P Global said that apart from the two largest economies in the Eurozone, output continued to grow but at the slowest pace since January. Inflation in the entire region has eased, with pressures on input and output prices also easing. The weakening of economic activity has also affected the labor market, with manufacturers cutting jobs at the fastest pace in more than four years. Employment in the service sector continued to grow, but at the slowest pace since August 2023. De la Rubia said, "We expect that the official employment data in the Eurozone, which has been stable so far, will deteriorate in the next few months, although the trend should be more stable than in previous periods of economic downturn." Elsewhere, the UK's composite PMI fell more than expected but remains in expansion territory. The PMI data for the US will be released later on Monday, with economists expecting the reading to remain stable at around 54.3.