The shaky Eurozone economy: Can it "persuade" the European Central Bank to press the accelerator on loose monetary policy?

The latest data on private sector business activity in the Eurozone has seen a significant downturn, which seems to provide a reason for the European Central Bank to accelerate its pace of rate cuts - at least in the eyes of investors. Whether this means the ECB will cut rates again next month remains unclear - the market currently sees this probability at 40%. However, the unexpected sharp decline in the area's composite PMI on Monday has led the market to expect a total rate cut of 43 basis points by the end of the year, higher than the previous expectation of 38 basis points, indicating the possibility of a larger move at the December meeting. Similar sentiments are spreading in the bond and foreign exchange markets: a key indicator of the normalization of Germany's bond yield curve, the euro falling after the release of this data. SEB strategist Jussi Hiljanen said, "Today's PMI data undoubtedly increase concerns about economic growth and increase the likelihood of another rate cut in October. But this is not decisive - they will conduct a comprehensive analysis, and the PMI is just part of it." Currently, there is growing concern that the European recovery at the beginning of the year has lost momentum. Output in the 20 EU countries began to decline in the second quarter, with consumers benefiting from cooling inflation and rising wages but still unwilling to spend. Weak foreign demand has also put pressure on factories. The struggles of German car manufacturers like Volkswagen highlight this issue. Data released by S&P Global shows that the economic softness in September is largely due to the diminished boost from France hosting the Olympics. As a result, its services activity index is far below the 50 threshold. Meanwhile, the deterioration in German manufacturing has further worsened, leading the Eurozone's overall index to drop to 48.9, below economists' forecast of 50.5. Although ECB staff have lowered their economic growth forecasts for this year, they still expect the economy to grow by 0.8%, largely driven by the recovery in consumer spending. However, households remain cautious, with conflicts in Russia, Ukraine, and the Middle East casting a shadow over their situation. Some more dovish ECB policymakers warn that keeping interest rates too high for too long could cause unnecessary damage to the economy. ECB Executive Board member Piero Cipollone recently said, "Our stance may become too tight, and there is indeed a risk." Bloomberg Economics Chief European Economist Jamie Rush said, "The composite PMI shows a deteriorating economic outlook. This reflects to some extent the return to reality for France 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. Significant growth deceleration would be unwelcome for the ECB. If further evidence shows an economic slowdown, this could raise the possibility of a rate cut at the October meeting." However, hawkish officials are not eager to implement more accommodative policies as they still see persistently high service sector inflation potentially delaying a return to the 2% target level. Latvian central bank governor Martins Kazaks said before the PMI data release on Monday that price risks outweigh concerns about economic growth. He said, "The risks of service price inflation persist, but as we move forward, we will see the situation develop." Slovak central bank governor Peter Kazimir said last week that he needs a "strong signal" about the economic outlook to support a rate cut in October. Therefore, the question here is whether the PMI data release emits such a signal. Other data to be released before the next ECB meeting include Germany's monthly Ifo economic survey and September Eurozone inflation data. Additionally, the Federal Reserve's strong launch of rate cuts amid sustained economic growth in the United States has heightened speculation about faster easing policies. Danske Bank strategist Marija Veitmane said, "The market is almost demanding more aggressive rate cuts, especially after seeing the Fed take action. The ECB is clearly behind the curve and needs to take more action." Allspring Global Investments' global fixed income team director of rates and forex, Lauren van Biljon, also believes that the ECB's focus on service sector inflation is "misplaced." She said, "Currently, we are pricing in most of the policy changes in the US - given that the US economy is still far ahead of all other developed markets, this is interesting." However, some analysts still believe that more evidence may be needed to convince the 26 members of the ECB Governing Council to support another rate cut in October. Dirk Schumacher, economist at French bank Natixis, said, "The risk of an economic recession has increased, and the ECB needs to seriously consider whether the basic assumption of a moderate acceleration in economic growth in the coming months still holds true. But to make such a reassessment, these weaker PMI figures need 'support' from hard data."