BNY has highlighted a significant downturn in Eurozone Purchasing Managers' Index (PMI) data, with the composite PMI for April dropping to 48.8 from 50.7 in March. This marks a 17-month low and signals a return to contraction for the first time in nearly one and a half years. The services PMI was particularly weak, falling to 47.6, its lowest level in 62 months [1].
Simultaneously, inflationary pressures have intensified across the Eurozone. Input costs surged to a 40-month high, and output prices increased at the fastest rate in three years, reinforcing concerns about stagflation. Eurozone industrial producer prices rose sharply in March by 3.4% month-on-month, reversing a 0.6% decline in February. Annual growth in producer prices reached 2.1%, indicating a renewed pickup in pipeline inflation pressures [1].
BNY notes that, for now, the European Central Bank (ECB) is the only Western European central bank clearly on course to tighten monetary policy. However, markets appear to believe that policy gaps between the ECB and its peers cannot widen significantly. BNY challenges this view, suggesting that softer demand and early ECB tightening could lead to the Euro underperforming on a relative-value basis against other currencies [1].
The report further states that if markets conclude that inhibiting rate hikes due to softer demand is the appropriate course, the Euro may weaken relative to its peers, which could greatly reduce pass-through risk [1].
CONCLUSION
The latest Eurozone PMI data and rising inflation pressures have heightened stagflation risks, according to BNY. With the ECB remaining on a tightening path amid weakening demand, the Euro may face relative underperformance if markets anticipate a pause in rate hikes. Investors should closely monitor policy signals and market reactions as the outlook remains uncertain.