The decision will be made in Frankfurt on September 12, which, data after data, is strengthening towards the direction of another cut, after the one in June and the pause in July. While waiting for the meeting, the numbers that will weigh on the decision of Lagarde & Co. are speaking. The European economy is slowing down. Wages, manufacturing and inflation demonstrate this and offer an assist for a new cut in interest rates in September by the ECB.
Wages first.
Wage growth in the eurozone has slowed, dropping to 3.6% per year in the second quarter of the year from 4.7% in the first three months. The decline is largely due to the slowdown in Germany. The data were released by the ECB, which also set the figure for the whole of 2023 at +4.48% (from +2.92% in 2022). This is therefore the first assist for an interest rate cut by the ECB on September 12.
Then there are the preliminary data of the PMI services and manufacturing indices (the final ones on September 4). European manufacturing continues to suffer, while the service sector accelerates. The PMI index, which measures the confidence of purchasing managers in the various production sectors, in the euro zone for manufacturing fell further in August to 45.6 points, against the 45.7 forecast by analysts and the 45.8 in July. Numbers that highlight a contraction in activity. Instead, the PMI for services accelerated, reaching 53.3 points in August against the 51.7 estimated and the 51.9 in July. It therefore exceeds the “alarm” threshold of 50.1 points. And as with wages, also for manufacturing it is Germany, among the major European economies, that is doing worse and dictating the line. In August the recession in the German manufacturing sector worsened. Second consecutive contraction, with a drop greater than expected. The manufacturing PMI fell to 42.1 from 43.2 in July and an expected 43.5 by analysts. For services, the reading went from 52.5 in July to 51.4 in August. In France, the manufacturing PMI fell to 42.1 from 44 and the services PMI reached 55 from 50.1 (50.2 was expected), thanks to the push of the Olympics. Just on the eve of the data release, Olli Rehn, Governor of the Bank of Finland and member of the ECB Council, had declared that in the absence of clear signals from the European manufacturing sector, “in my opinion, the recent increase in risks for growth in the euro area is one more argument for a rate cut at the next ECB monetary policy meeting in September”. Second assist, therefore, for an interest rate cut by the ECB on 12 September.
And then there’s inflation.
The 2% target is still there, guiding Frankfurt’s monetary policy. The October 2022 peak, 10.6%, is far away. But in July there was a slight acceleration to 2.6% and 2.9% on a core basis. Tomorrow (August 23) the ECB will publish its one-year and three-year inflation expectations. Then the last test, on August 30, when there will be the preliminary version of the month’s data. This could be the third assist for September 12.
According to a Reuters poll, eight out of ten economists expect two rate cuts by the end of the year: in September and December. September 12 is expected. But piece by piece the chance of a new rate cut in Frankfurt is becoming stronger.
