Market Analysis

Euro zone business activity showed unexpected strength in August, despite firms raising prices, according to a survey. This resilience could temper expectations for additional rate cuts by the European Central Bank (ECB) this year.

The recovery was uneven, with a strong rebound in the services sector offsetting a deeper downturn in manufacturing. The HCOB preliminary composite Purchasing Managers' Index (PMI), compiled by S&P Global, rose to 51.2 in August from 50.2 in July, moving away from the 50 threshold that separates growth from contraction. This exceeded the Reuters poll's expectation of a decline to 50.1 and even surpassed the most optimistic forecast of 50.8.

The increase in activity occurred despite a faster pace of price increases, with the composite output prices index climbing to 52.9 from 52.1. This unexpected rise in inflation for July, coupled with a resilient labor market and steady economic performance, could lead ECB policymakers to adopt a cautious stance.

After reducing the deposit rate in June, the ECB paused in July, though a Reuters poll last week suggested two more rate cuts this year. The PMI for the services sector surged to 53.3 from 51.9, surpassing expectations of no change. This rise was partly driven by services firms addressing work backlogs, and overall demand improved, with the new business index reaching a three-month high of 51.3 from 50.8.

In contrast, the manufacturing PMI fell to an eight-month low of 45.6 from July's 45.8. However, the output index edged up to 45.7 from 45.6. Factory managers' optimism declined further, and they cut jobs at the fastest rate since November. The manufacturing employment index dropped to 46.6 from 47.0.

Paraphrasing text from "Reuters" all rights reserved by the original author.