Eurozone businesses reported their strongest month in over three years in September, a surprise that has revived speculation the European Central Bank will raise interest rates again at its October meeting.
S&P Global's flash Eurozone Composite Purchasing Managers' Index (PMI) rose to 53.1, its highest reading since April 2021. The index is a monthly survey of thousands of companies across the bloc, and any reading above 50 signals that business activity is expanding. The latest figure marks an improvement from August and came in well above what economists had expected.
The pickup was led by the services sector, which continued to grow at a solid clip, while manufacturing activity held steady. According to Chris Williamson, chief business economist at S&P Global, the survey results are consistent with the eurozone economy expanding at a quarterly pace of around 0.4%.
Why the data matters for rates
The stronger growth picture is not the only thing catching the ECB's attention. The survey also showed that price pressures—the very thing the central bank has been trying to tame—are picking up again. That combination of resilient growth and firmer inflation is exactly the kind of environment that makes policymakers think twice about pausing their tightening campaign.
Just a few weeks ago, many investors and economists believed the ECB was done raising rates, having already lifted its deposit rate to a record high. But the latest PMI reading has shifted the calculus. Williamson said the October move is now "very much on the table," a notable shift in tone from a central bank that has been trying to signal it is nearing the end of its hiking cycle.
The ECB has been battling inflation that, while down from its double-digit peak, remains stubbornly above its 2% target. Rate hikes are the central bank's main tool for cooling price growth, but they also slow economic activity. The new data suggests the eurozone economy may be resilient enough to absorb another increase.
What it means for investors
For everyday investors, the prospect of another ECB rate hike has several ripple effects. Higher rates tend to push up borrowing costs for households and businesses, which can weigh on corporate profits and stock valuations. Sectors that rely heavily on borrowing, such as real estate and utilities, are often the most sensitive to rate changes.
On the other hand, higher rates can be a boon for savers, as banks typically pass on some of the increase to deposit accounts. Bond investors may also see yields rise, which can make fixed-income investments more attractive relative to stocks.
The euro itself could also strengthen if the ECB follows through with a hike, as higher rates tend to attract foreign capital. That would make European exports more expensive but could help lower import costs, including for energy.
Investors will now be watching closely for any hints from ECB officials in the coming weeks, as well as the next round of inflation data. The central bank's October meeting is scheduled for late in the month, and the PMI data has clearly raised the stakes.
For now, the message from the survey is that the eurozone economy is not as fragile as some feared. But that resilience comes with a cost: the fight against inflation is not over, and the ECB may need to keep its foot on the brake a little longer.
