France PMI returns to growth in September; rising price pressures challenge ECB

• France's services sector flash PMI for September hit 51.4, beating the 48.3 forecast and up from 48.0 in August.
• The manufacturing flash PMI came in at 50.3, below the 50.9 estimate and down from 51.1 previously.
• The composite flash PMI stood at 51.2, well above the 48.7 expectation and rising from 48.5 last month.

These figures show a strong performance, with French business activity climbing back above the 50.0 expansion threshold in September, helped by a better showing from services. The services PMI headline is the highest in ten months, pushing the overall expansion to its fastest pace in just over two years.

Demand conditions improved, reflecting increased sales activity in services, though employment continued to fall and business optimism weakened further.

New orders rose slightly, the first improvement in ten months. Exports became less of a drag on overall sales, as new foreign business contracted at the softest rate so far this year.

The key element for the ECB's outlook and market attention is the inflation picture. According to the report, inflation across France's private sector accelerated sharply at the end of the third quarter. Both input and output prices rose at faster rates for the first time since May, as higher cost pressures were passed on to clients through increased charges.

Survey participants frequently mentioned fuel price increases, along with component, energy and metals costs, as drivers of inflation.

Before the data, markets were pricing in about a 45% chance of a 25-basis-point rate hike by the ECB in October. That probability has moved little, now sitting around 47%.

The initial market reaction appears muted. However, France's data may have raised the bar for upcoming PMI readings in terms of a dovish interpretation. If other reports also show firmer demand alongside accelerating prices, October rate expectations could become considerably more sensitive.