German flash manufacturing PMI tops forecast at 54.2 in October

• The manufacturing gauge had been 53.9 previously.
• Services PMI came in at 51.7, less than the 52.5 that was expected.
• The services PMI had been 52.9 previously.
• Composite PMI stood at 52.8, versus a 53.3 forecast.
• The previous composite reading was 53.8.

Main findings:

A softening in economic activity set in during October.

Commentary:

Phil Smith, Economics Associate Director at S&P Global Market Intelligence, said:

"October's flash PMI results encouragingly showed a sustained upturn in business activity across Germany, although a slowdown in growth underscored that the recovery in the eurozone's largest economy remains fragile. Inflows of new work rose only modestly and at the slowest rate for three months at the start of the fourth quarter, with a stalling of new business growth in the service sector highlighting the ongoing headwinds to demand from elevated inflation and uncertainty.

"Labour market conditions continue to show a very gradual improvement, reflecting a steady but modest pace of job creation among services providers alongside an increasingly stable picture in the manufacturing sector.

"Whilst goods producers continued to see business conditions improve, aided by sustained growth in export sales and the filtering through of increased defence and infrastructure spending, a renewed surge in cost pressures has dampened expectations across the sector, with the two likely to remain intrinsically linked in the months ahead."

Market expectations are being confirmed by these PMI readings, which point to a slowdown in economic activity. Germany's private sector kept growing in October, though the pace of activity clearly eased, with the composite index dropping to 52.8 from 53.8 in September. The gauge remained above the 50 line that separates expansion from contraction, but the deceleration was widespread, hitting manufacturing output and services activity alike. New business inflows rose at their slowest pace in three months, and services demand stalled as customers postponed decisions and worked with tighter budgets.

Downside risks are mounting for the months ahead. Manufacturers' confidence deteriorated markedly, with expectations sliding to their lowest since July as higher oil prices and raw-material costs intensified worries about margins and the outlook. At the same time, soft services demand and slower new-order growth could weigh on output if companies turn more cautious about spending and hiring.

With French and German PMIs both coming in weaker, the ECB has been repriced dovishly, as the case for more tightening is being undermined by signs of an economic slowdown.