Eurozone sentiment weakens in October as price expectations tick up
The desk anticipates a cautious shift in Eurozone sentiment based on the recent decline in the Economic Sentiment Indicator and rising price expectations, as per the full note from ing-think. The sentiment indicator fell from 97.5 to 96.9 in October, marking the weakest level since June, signaling potential headwinds ahead. Despite recent improvements in industrial sentiment, especially regarding new orders and hiring prospects, the persistent high energy prices may hinder actual production increases. This backdrop positions the European Central Bank on alert for second-round inflation effects while maintaining a cautious stance on monetary policy tightening.
What the desk is arguing
The desk sees the decline in Eurozone sentiment as a precursor to potential economic challenges, especially given the uptick in price expectations. With industry indicating more optimism in hiring and orders, yet also grappling with rising production costs due to high energy prices, economic adjustments may be needed. Per the full note from ing-think, while manufacturing sentiment shows signs of improvement, the service sector has dampened expectations with sluggish demand, particularly in the face of inflation worries affecting consumer behavior.
The Economic Sentiment Indicator's dip, now at 96.9, suggests that while businesses remain optimistic about their future prospects, consumer caution continues to pose risks to growth. Expectations for higher prices can trigger a feedback loop of inflation if businesses pass these costs onto consumers, complicating the ECB's decision-making in upcoming meetings.
The alternative read would be that current sentiment remains resilient enough to stave off deeper economic troubles, especially if the service sector rebounds and consumer confidence bolsters, but this seems less likely given the data.
Where it sits in our coverage
Our consensus target for EUR/USD is currently set at 1.075, with a range between 1.04 and 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's outlook contrasts slightly with bofa, which projects a more cautious view on the Euro, setting their target significantly lower at 1.04. Therefore, our position aligns more closely with jpmorgan's higher target, suggesting a more optimistic tone amid current sentiment declines.
How other firms see it
Firms like jpmorgan and other aligned institutions remain optimistic, as indicated by their higher target prices, anticipating that the Eurozone may navigate these challenges successfully. Conversely, firms like bofa predict a weaker Euro zone trajectory, suggesting a limited recovery potential in the near term.
Monitoring the EUR/USD trajectory will be essential, particularly as it may reflect forthcoming ECB policy decisions amidst these sentiment challenges and economic forecasts. The interplay between service sector performance and consumer sentiment will also be critical indicators of future movement.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Economic Sentiment Indicator dropped to 96.9, lowest since June.
- 02Industrial sentiment shows improvement, but high energy costs loom large.
- 03Consumer caution persists, impacting major purchases.
- 04ECB remains vigilant for inflation risks amid these developments.
Market implications
Watch for potential downward pressure on the EUR/USD if consumer sentiment fails to pick up as expected. A decisive break below 1.06 could indicate deeper concerns about Eurozone growth prospects, particularly in light of these sentiment changes. Monitor remarks from the ECB in upcoming meetings for potential shifts in tone or policy direction.
Risks to this view
Should inflation expectations begin to moderate or if substantial recovery signs emerge from the service sector, this could lead to a reassessment of the current outlook. Additionally, any unexpected policy pivot from the ECB towards tightening could also challenge the bearish sentiment seen post-report.
Older quick take Quick take Published 10:38 Eurozone sentiment weakens in October as price expectations tick up Eurozone industry remains upbeat despite weaker production data, but the service sector experienced sluggish demand at the start of the fourth quarter. With energy prices still on the rise, selling price expectations ticked up again The Economic Sentiment Indicator for the eurozone fell from 97.5 to 96.9 in October, with employment expectations ticking up slightly. Sentiment reached its weakest level since June.
For manufacturing, production has shrunk in recent months. But surveys tell a much more upbeat story. Industrial sentiment improved in October; businesses indicated that recent production was up, new orders are improving and that they are more likely to hire than last month.
The question is when stronger positivity is going to translate into stronger production figures, especially with continued high energy prices weighing on energy-intensive sectors. The service sector was more downbeat, but not to a dramatic degree either. The eurozone economy still seems to be trucking along at a decent pace.
While businesses in the service sector were more downbeat on demand in October, they did become slightly more optimistic about the months ahead. Consumers did express more worry, especially about personal finances, and seem to be shying further away from major purchases. Recent high inflation and the general economic environment remain the main culprits for consumer caution.
Importantly for the European Central Bank this afternoon, both industry and services expect stronger price increases in the months ahead. This is especially the case for goods, which, admittedly, make up a smaller part of the total inflation basket than services. There isn't any immediate need to hike, of course, but the ECB will remain on high alert to see to what degree second-round effects will ultimately materialise.
GDP Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Bert Colijn Chief Economist, Netherlands Older quick take
Sources & References
How we cover this story