Eurozone growth rolls on as French PMIs reach six-year high

Eurozone growth continues on a tear, with data on Tuesday showing the services sector slowing slightly and manufacturing activity accelerating.

The services purchasing managers' index for October softened to 54.9 from 55.8 a month before, IHS Markit revealed on Tuesday.

With a PMI reading above 50 indicating growth, this 'soft' data suggested growth the services sector remained strong but slowed modestly, though these figures were 'flash' early readings.

For manufacturers, the PMI strengthened to 58.6 from 58.1, confounding expectations for a fall to 57.8.

As a result, October's composite PMI eased to 55.9 from 56.7, weaker than the consensus forecast of a smaller decline to 56.5.

Overall, robust new orders growth boosted job growth increased to its highest pace since the data was first collected in 1997.

By country, German composite PMI was below expectations in October, decreasing from September's six year and half year high to 56.9, driven primarily a dip in manufacturing output, while the French composite PMI surprised to the upside in October, rising to 57.5, its highest reading since May 2011.

The decline was likely to be driven mainly by peripheries such as Italy, Spain and Ireland.

"The dip in the services index to 54.9 has to be watched for further weakness," said economist Claus Vistesen at Pantheon Macroeconomics, "but for now it signals robust growth in the private sector".

He noted that the PMI has been too optimistic on GDP growth recently, but the chart shows that the headline index signals strong and stable momentum.

Barclays noted that the composite PMI drop was driven by future output, with demand remaining elevated, in particular as foreign orders rebounded after last month’s weakness, suggesting that concerns over past euro appreciation have waned somewhat.

"It is worth highlighting that input prices reached a seven-month peak - driven mainly by higher manufacturing input costs - but that despite strong demand it was only partially transferred to clients, rather than squeezing firms’ margins," Barclays said.

Altogether, the bank's economists expect economic activity to continue to grow at a solid pace of 0.5% quarter on quarter in Q4, with buoyant domestic demand offsetting the moderation in net trade in the second half of the year.

Overall forward-looking components suggest to Barclays that German confidence will hover around current elevated levels, without further substantial gains in the months ahead, while broad-based French confidence suggests that the growth momentum should be maintained in the fourth quarter.