Europe close: Shares up as dire PMI’s lift hopes of rate pause

by | Aug 24, 2023

(Sharecast News) – European shares closed higher on Wednesday, as a survey showing eurozone services and manufacturing activity fell faster than thought in August, especially in Germany, giving traders some hope that the European Central Bank may pause its rate-hike cycle next month.

The pan-regional Stoxx 600 index finished 0.39% higher at 453.45 points, with all regional bourses higher. Eurozone business activity contracted at an accelerating pace in August as the region’s downturn spread further from manufacturing to services, according to PMI survey data published on Wednesday.

The S&P Global composite index flash reading fell to 47.0 from 48.6 in July, its lowest since November 2020. If pandemic months are excluded, the latest reading was the lowest since April 2013.

A mark of 50 separates contraction from expansion.

“Rather perversely this hasn’t been taken as the negative as it might have done as it serves to prove that the rate hikes that have been implemented by central banks are starting to have the desired effect, as services sector activity slowed more than expected in August,” said CMC Markets analyst Michael Hewson.

“It could also mean that we might see a pause from the ECB next month, and at the most another 25bps from the Bank of England when they next meet in September.”

The services PMI fell to 48.3 from July’s 50.9 – a 30-month low, while the manufacturing reading ticked up slightly to a two-month high of 43.7 from 42.7 the prior month.

Both manufacturing and services sectors reported falling output and new orders, albeit with the goods-producing sector registering by far the sharper rates of decline, S&P said.

“Hiring came close to stalling as companies grew more reluctant to expand capacity in the face of deteriorating demand and gloomier prospects for the year ahead, the latter sliding to the lowest seen so far this year,” it added.

“While inflationary pressures continued to run far lower than seen over much of the past two-and-a-half years, led by falling manufacturing prices, August saw headline rates of input cost and selling price inflation tick higher due in part to upward wage pressures.”

In Germany business activity suffered the steepest decline for more than three years in August, as a deepening downturn in manufacturing output was accompanied by a renewed contraction in services activity.

“Businesses remained pessimistic towards the outlook as rising interest rates, customer uncertainty and high inflation continued to weigh on demand for goods and services. Notably, the survey showed an increase in inflationary pressures, driven by accelerated cost and price increases in the service sector,” S&P said.

The headline composite PMI Output Index remained fell for the fourth month in a row from July’s 48.5 to 44.7, the index moved deeper into sub-50 contraction territory to its lowest since May 2020.

Markets are also starting to turn their attention to the US gathering of central bankers at Jackson Hole this weekend for any clues on the future path of interest rates.

“Investors will be eager for clues as to how long the fight against inflation will continue, where interest rates will end up and just how long they will stay at painful levels,” said Hargreaves Lansdown analyst Susannah Streeter.

“While worries about the effect of an embedded price spiral are still brewing, partly due to super-strong job markets, there is also growing unease at the splintering impact on economies caused by the sledgehammer policy of hiking rates rapidly.”

Reporting by Frank Prenesti for Sharecast.com

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