Eurozone PMI data to shed light on inflation, ECB policy

Preliminary purchasing managers' index figures for September are due later today for France, Germany and the euro area as a whole. Market consensus estimates are as follows:

• Manufacturing PMI is seen at 50.9 for France (prior 51.1), 54.0 for Germany (prior 54.3), and 52.6 for the Eurozone (prior 52.7)
• Services PMI: France 48.3 (prior 48.0), Germany 50.0 (prior 49.7), Eurozone 51.5 (prior 51.6)
• Composite PMI: France 48.7 (prior 48.5), Germany 51.8 (prior 51.8), Eurozone 51.7 (prior 52.0)

While the headline figures will indicate if euro area growth is sustained, the more critical market concern is what the data suggests regarding the European Central Bank's upcoming policy decision.

Traders currently see about a 45% probability of a 25-basis-point rate increase in October, with a full additional hike not priced in until December at the earliest. This provides ample scope for incoming data to shift market views.

The inflation components of today's PMIs may carry more weight than the business activity readings.

One key area to watch is input costs, especially if elevated energy prices are spreading more widely into business costs. More crucial, however, are output prices—the amounts firms charge customers. A fresh increase there would indicate that companies are effectively passing on higher costs, making it more difficult for the ECB to disregard the inflation impact.

Additionally, the services sector deserves close examination. Sustained price pressures in services would suggest domestically driven inflation, while employment trends may provide hints about wage and labor cost developments.

This is significant because the ECB has resisted the idea that it should tighten policy merely due to higher energy prices. Instead, officials have emphasized the importance of evaluating the wider economic and inflation landscape.

Taking everything into account, a slight PMI upside may not be sufficient to alter the ECB's outlook. However, stronger economic activity coupled with more robust inflation pressures could significantly increase the likelihood of an October rate move.