Euro zone slowdown deepens as inflation stays sticky, vexing ECB

October's PMI readings offered little encouragement for the euro area economy. Growth is slowing, companies are under pressure, and inflation refuses to subside. That is the last thing the ECB needs right now.

Data from manufacturing and services both disappointed, with services slowing markedly. Much of that came from France, where business activity returned to contraction in October. Germany is holding up better, but the region's broader slowdown is becoming harder to ignore as the final quarter gets underway.

This puts the ECB in a tough spot. Even as business activity cools, price pressures have not abated.

Businesses are still facing high cost pressures. The report pointed to a sharp increase in manufacturers' input costs in October, the steepest since May, driven mainly by energy prices.

Output price inflation did ease slightly during the month, which is one positive. But it could mean businesses are struggling to push higher costs through to customers.

That leaves the ECB with a difficult choice.

Markets see roughly a 90% chance the ECB holds rates at next week's meeting. For December, traders assign about 68% odds of a rate hike.

Inflation remains the top concern for policymakers. However, today's data also suggests the euro area economy is not in strong shape for further tightening. France stands out as especially strained given fiscal worries and public finance concerns. Spillover effects to other countries are a real risk.

The main question is not whether the ECB will pause next week, which looks all but certain. It is whether they can keep raising rates if growth continues to wane while higher energy costs squeeze firms and households, and fiscal anxieties spread.