The worsening economic slowdown in the eurozone is fueling bets on a September pause by the ECB

The contraction of private sector activity in the eurozone has intensified, leading investors to speculate that the European Central Bank will suspend its interest rate hike campaign next month.

Services ceased to be a bright spot in August and followed the industrial sector into a slowdown in the region’s two leading economies, prompting a shift in market bets and causing bond yields and the euro to fall. The region’s flash purchasing managers’ index dropped to 47, below the 50 threshold, indicating growth. Service activity decreased for the first time since the end of 2022, while there had been expectations of continued expansion in a sector that had experienced strong demand until recently.

The figures were particularly dismal in Germany, where overall activity declined the fastest since the first wave of the pandemic halted the economy in May 2020. France reported a third monthly drop in output, while the rest of the region contracted more moderately. Data indicates that the eurozone will experience a contraction of 0.2% in the third quarter, compared to a growth of 0.3% in the three months up to June.

As a result, European bonds rallied, with the 10-year German yield dropping by 12 basis points to 2.53%. However, a decline in activity doesn’t necessarily mean less inflation. The situation in Ukraine and maintaining a status quo are causing higher commodity prices, which are expected to continue driving inflation.