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Euro Slides as Eurozone Manufacturing Slowdown Deepens

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- EUR weakens as PMIs flag continued growth slowdown in Q4.

- After global uncertainty hits Eurozone exports in November.

- Softening economy now threatens the ECB policy outlook.

The Euro hit the ropes Friday after November's IHS Markit PMI surveys showed the single currency bloc's economy softening even further in the final-quarter, casting a shadow over the European Central Bank (ECB) policy outlook.

The Eurozone manufacturing PMI fell from 52.0 to 51.5 in November when markets had looked for it to remain unchanged, while the services PMI declined from 53.7 to 53.1 when economists had penciled in only a minor fall to 53.6. 

This led the Eurozone composite PMI down from 53.1 in October to 52.4 in November, marking a 47-month low, as business activity grew at its weakest pace for more than four years. 

Softness in both French and German manufacturing sectors led the decline in the overall index for November, with falling exports and declining new order growth driving the downturn. 

"The rise in factory output was the weakest since the recovery in production began in July 2013. Production growth came to a near-standstill in response to second successive monthly falls in factory orders and exports," says IHS. 

Weakening global demand amid high levels of uncertainty about the economic outlook was responsible for the fall in export orders, although the so-called trade war and sluggish car sales were also cited as headwinds.

"When all is said and done, a PMI headline if 52.4 is not catastrophic, but it does suggest that the growth in the Eurozone is slowing faster than markets, and the ECB, expect. Mr. Draghi recently held on to his view that risks remain “broadly balanced,” but these data suggest that the president will have to change his tune next month," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Markets care about the PMI data because they are an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dicate where interest rates, which are the raison d'être for most moves in exchange rates, will go next.

"November’s fall in the Composite PMI raises doubts about whether the economy will rebound after a weak Q3," says Jack Allen, an economist at Capital Economics. "The PMIs are unlikely to be weak enough to change the ECB’s plans to end its asset purchases next month."

The Euro-to-Dollar rate was quoted -0.21% lower at 1.1378 following the release Friday, afer reversing an earlier gain, while the Euro-to-Pound rate was -0.01% lower at 0.8852. 

Friday's data matters to the market because the Euro's appeal to investors is hinged upon the bloc's economy growing at a pace sufficient enough to support a sustainable return of inflation toward the target of "close to but below 2%", which is key to when the ECB will "normalise" its interest rate policy. 

"We still suspect that the Bank will start raising interest rates next September. But if growth fails to rebound, or problems in Italy start to hurt the wider euro-zone economy, the Bank might think twice about tightening policy next year," says Capital Economics's Allen. 

The ECB said in October it still intends to end its quantitative easing programme in December, through which it has kept continental bond yields pinned down at record lows in order to stimulate the economy and stoke inflation.

And the bank also reiterated its guidance that benchmark interest rates would remain at their current record lows at least "through the summer of 2019", which markets have taken to mean that a rate rise is likely to come at the end of 2019.

However, both of these commitments were made at a time when the full extent of the third-quarter slowdown was not known and risks to the economic outlook were judged as still "balanced". 

But since then official data has shown Eurozone growth halving to just 0.2% during the third-quarter, while the German economy actually contracted.

Some factors behind the downturn were seen as temporary, although not all and Friday's figures suggest the slowdown could be more than a transitory thing. 

"Amid signs of slower growth, inflation pressures continue to rise, sending a signal that the growth mix has switched, which is usually a bad sign in the Eurozone," says Pantheon's Vistesen. "A base case of growth at 0.4% quarter-on-quarter will be difficult to sustain if these data are sustained."

 

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