The November inflation data likely won’t change the ECB’s current path but highlights challenges in its decision-making process. A drop in monthly core inflation and service prices suggests disinflationary forces are still present. This trend could justify lowering interest rates in December, as eurozone economic activity weakens.
Recent Purchasing Managers’ Index (PMI) data underscores this slowdown. The eurozone Composite PMI dropped to 48.1 in November from 50.0 in October, the sharpest contraction since January. This reading fell below market expectations of no change.
The services sector, previously a stabilizing factor, entered contraction for the first time in 10 months. Its PMI dropped to 49.2 from 51.6 in October, while manufacturing remains in a deep slump.
Market analyst Kyle Chapman noted, “The market expects a 25-basis-point cut in December, especially after Schnabel’s hawkish comments ruled out 50 basis points. The economy isn’t collapsing yet, and uncertainty around the neutral rate means no urgency to frontload cuts.”
Germany’s Retail Sales Plunge Deepens Concerns
Germany, the eurozone’s largest economy, continues to struggle with declining consumer spending.
October retail sales fell 1.5% month-on-month after a revised 1.6% rise in September, exceeding expectations of a 0.3% drop. This marks the sharpest monthly decline in two years, signaling deteriorating consumer confidence and economic fragility.
The weak retail performance adds to mounting concerns about broader eurozone economic challenges.
Inflation Trends Highlight Diverging Pressures
Eurozone annual inflation rose to 2.3% in November from 2% in October, meeting market expectations. This increase reflects narrowing deflationary effects from energy prices, though the monthly data paints a more optimistic picture.
Consumer prices fell 0.3% month-on-month in November, the steepest decline since January 2024. This supports hopes that disinflation continues, possibly opening the door for further ECB rate cuts.
Energy prices fell 1.9% year-on-year, less than October’s 4.6% drop, as last year’s base effects faded. Monthly energy prices rose 0.6%. Excluding energy, annual inflation held steady at 2.7%, with core inflation inching up to 2.8% year-on-year from 2.7% in October.
However, monthly core inflation fell 0.4%, hinting at easing underlying pressures. Services prices rose 3.9% year-on-year but dropped 0.9% month-on-month, offering a hopeful sign for the inflation outlook.
Markets React Mutedly
Financial markets showed little response to the mixed data. The euro held steady at $1.0560, and eurozone sovereign bond yields remained unchanged.
Germany’s 10-year Bund yield hovered at 2.12%, its lowest in nearly two months. Equity markets also traded flat, with the Euro STOXX 50 index showing no movement after a slight rise on Thursday.
Among major stocks, Airbus SE rose 1.3%, Schneider Electric SE gained 1%, and LVMH added 0.6%. Meanwhile, Telefonica fell 1.5%, and Banco Santander dropped 1.2%.
The mixed signals from inflation and economic activity leave the ECB navigating a challenging path as it considers its next policy moves.