CAC Shakes Off Weak PMI Data – ECB Policy in Front Seat, Political Woes on Sidelines

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Data released today showed a sharp decline in business confidence and Flash PMI data. Concerns over the national budget take a back seat.

For today’s Flash HCOB Services and Manufacturing PMIs analysts had been expecting a slight increase. Instead, the market was presented with declines in both.

The Services PMI showed a provisional decline to 48.3 from 49.6 previously, while the manufacturing PMI declined slightly to 44.5 from 44.6. And Business Confidence took a hit, with a drop to 92 from last month’s reading of 98.

The CAC managed to shake off the negative surprise in the data and rallied to 0.67% on the day. Political concerns have been acting as a weight for French stocks. The govenment presented the 2025 budget to the National Assembly on October10, but investors are concerned about the weight of tax hikes on large companies.

Those concerns seem to have taken the back seat as the market follows bullish ECB sentiment, with the DAX leading the way, up 0.82%.

ECB Sentiment Grows

Sentiment on dovish ECB policy action is growing. Investors are gearing up for a bumper cut in rates at the next policy meeting. The anticipation of a 50 basis point cut in interest rates for the December meeting has been circulating for a few days.

That sentiment is gaining more conviction as comments from various ECB policymakers and national central bankers call for sharp cuts. The latest official to add statements of the kind is Bostjan Vasle.

In a Reuters interview, Vasle said that the ECB should take measured steps to keep cutting rates. Adding that talk of undershooting the inflation target is unwarranted now. The central banker said that going below the neutral rate is not an issue in this environment.

The GDP growth in the ECB has been weak and is expected to decline for FY 2024. The market is beginning to believe that the ECB may act swiftly to cut rates to a level of economic stimulus. The chance of a 50bp cut in December is now at around 40%.