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A 50-bps ECB cut in December? Discouraging euro zone PMI keeps markets guessing



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A 50-BPS ECB CUT IN DECEMBER? DISCOURAGING EURO ZONE PMI KEEPS MARKETS GUESSING

There's just no relief for the euro zone economy, and the bloc's disappointing business activity data was the latest evidence. With more economic pain likely knocking on the door, analysts are now calling for more aggressive ECB interest-rate cuts.

"The ECB has to figure out whether this is the PMI crying wolf or whether it should take this signal seriously," said ING's chief economist Bert Coljin.

Matthew Landon, JP Morgan Private Bank's global market strategist said "This report truly puts a 50-basis-point cut on the table for December."

The European Central Bank cut interest rates by 25 bps in October, its third cut this year, with markets previously hoping for another similar-sized cut in December.

However, bets moved in favor of a 50-bps cut after the data showed euro zone's PMI sank to a 10-month low in November, below the 50 mark separating growth from contraction.

"The price components of the PMIs – as well as recent comments by ECB policymakers – suggest that we will have to revisit our forecast of a 50-bps rate cut in December if there is not a downside surprise in the November inflation data" says Andrew Kenningham, Chief Europe Economist at Capital Economics.

The Pan-European STOXX 600 index .STOXX briefly turned negative after the data, dragged by bank stocks .SX7P, while German short-dated government bond yields and the euro tumbled to their lowest level in around two years.

Yet another cause of concern is the deteriorating German economic health, with the country representing over 30% of the bloc's GDP. With the German economy growing less than previously estimated in third quarter, any further damage to the traditional powerhouse could unleash more aggressive ECB rate cuts.

A second Donald Trump presidency raises the prospects of hefty tariffs, paving the scope for deeper losses in the euro and stocks.

"The data showed political concerns, both domestic and stemming from the election of Donald Trump, weighing heavily on sentiment," said Nick Rees, senior FX market analyst at Monex.



(Joao Manuel Mauricio)

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