25 October 2021
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Activity in Eurozone dips at start of Q4

Firms suffer from high input costs as inflation spreads globally.

By Edward Bell

  • Flash PMIs from the Eurozone showed that the regional economy slowed into the start of Q3 with the composite indicator falling to 54.3 from 56.2 a month earlier and representing its lowest level since April. The dip appears to have been led by the services sector where the index fell to 54.7 from 56.4 a month earlier while manufacturing held steady at around 59. However, manufacturing output fell while input prices and backlogs continue to act as a drag on activity.
  • In the UK, by contrast, the October flash PMI improved to 56.8 from 54.9 a month earlier thanks to a sharp jump in the services component, rising to 58 from 55.4 while manufacturing fell to just barely above the neutral 50 level. The UK economy is enduring the impact of tight energy markets and acute supply chain disruption and also contending with a sharp recent rise in Covid-19 cases. Like in the Eurozone, input prices remain high which could help to fuel a persistent acceleration in inflation in the UK and lead the Bank of England to a preemptive rate hike as early as this year.
  • The global surge in inflationary pressures is even being felt in perennial price laggard Japan. The CPI index rose 0.2% y/y in September, its first positive print since August 2020 and was actually kept at a relatively low level by one-off effects of lower telecommunications fees. Higher energy prices will feed directly into higher inflation prints in Japan—LNG prices have hit new highs of around USD 35/mBtu while domestic gasoline prices have moved to their highest levels since 2014.
  • Saudi Arabia has announced a net-zero carbon emissions target for its economy by 2060. The move follows the UAE’s own net-zero target announced earlier this month and with a target date of 2050. According to commentary from Mohammed bin Salman, crown prince of Saudi Arabia, and Abdulaziz bin Salman, the energy minister, much of the contribution to the net-zero target will come via carbon capture and storage, most likely targeting the country’s power sector. The commitment comes ahead of the Cop 26 climate summit at the end of the month and would not target emissions produced by consumption of exports of Saudi oil and gas products. Separately, Saudi Aramco announced it would hit a net-zero target by 2050.
  • Turkey’s central bank cut its one-week repo rate by 200bps to 16%, its second cut in a row. According to commentary from the MPC, inflationary pressures will leave “limited room” for further “downward adjustments” in policy rates although the prospects of raising rates to deal with elevated inflation—at 19.6% y/y in September—appears limited.

Today’s Economic Data and Events

12:00 GE IFO Survey (October)

18:30 US Dallas Fed Manf. Activity (October): forecast 6.2

Fixed Income

  • US Treasuries resumed their sinking trend last week with a broad index of USTs falling by almost 0.4% last week. Chair of the US Federal Reserve, Jerome Powell, noted the risks of higher inflation caused by supply chain disruptions at an event at the end of last week but also expected that supply chain problems would eventually ease. Nevertheless, the Eurodollar curve continues to pitch higher in anticipation of rate hikes coming sooner in the US.
  • The belly of the curve led the move upward in UST yields with 2yr UST yields adding almost 6bps to 0.4534% while the 3yr and 5yr notes added more than 7bps each. On the 10yr, yields added 6bps over the week to settle at 1.6324%.
  • The move in UST yields was mirrored in Europe where a broad index of European benchmark bonds fell almost 0.5% last week. Yields on 10yr bunds added 6bps to close at -0.107% while the 10yr gilt yield gained 4bps to 1.143%.
  • Emerging market bonds continue to suffer from the impact of higher UST yields. Bonds were weaker across the EM universe with yields on 10yr Indian government local currency bonds up 3bps to 6.363% last week while similar bonds from South Africa saw yields jump almost 16bps to 9.905%. However, those moves higher was far outpaced by a more than 70bps gain in Turkish government bond yields as the market responded to another 200bps cut from the CBRT at the end of the week.
  • S&P affirmed their rating on Turkey at ‘B+’ with a stable outlook at the end of last week.
  • ACWA Power, a Saudi Arabia-based utility developer, is planning to use green bonds for a USD 12bn gasification plant to be built in Red Sea region of Saudi Arabia.
  • Central banks meeting this week include Bank of Canada on Oct 27 while the European Central Bank, the Central Bank of Egypt and Bank of Japan all meet on Oct 28.


  • Higher UST yields over the week failed to lift the dollar with the broad DXY index falling 0.3% to 93.642 last week. Much of the gains came from the USDJPY which fell 0.63% to 113.50 over the week with the prospect of inflation actually staying in positive territory for Japan. EURUSD also helped provide some weakness for the dollar with the pair up 0.36% last week to 1.1643 even as activity data has stayed weak.
  • Sterling closed the week roughly flat at 1.3755 while commodity currencies strengthen over the week. CAD was modestly stronger with USDCAD down 0.02% while AUD gained 0.6% to 0.7466 and NZD added 1.3% to 0.7157.


  • Global equity benchmarks were generally stronger last week with the S&P 500 adding 1.6% while the Dow and Nasdaq gained more than 1% each. The EuroStoxx 500 added 0.14% while the FTSE gave up 0.4%.
  • In Asia, Chinese markets were generally the outperformers with both Shanghai and the Hang Seng gaining while the Nikkei sold off around 0.9%.


  • The relentless rise in oil prices continued last week. Brent futures rose 0.8% last week, its seventh consecutive gain, and settled at USD 85.53/b while WTI rose 1.8% to USD 83.76/b, gaining nine weeks in a row. Near-dated time spreads remain at highly elevated levels with 1-2 month spreads in WTI markets at more than USD 1.20/b while the same spread in Brent markets is just shy of USD 0.9/b.
  • Saudi Arabia’s energy minister, prince Abdulaziz bin Salman, said that OPEC+ producers needed to be “careful” in restoring oil production and that the price gains shouldn’t’ be taken “for granted” even as oil prices are threatening the global recovery from the Covid-19 pandemic.
  • Industrial metals adjusted downward last week after a few weeks of strong gains. Copper prices fell almost 6% last week to USD 9,704/tonne, moving away from its multi-year highs above USD 10,000/tonne.
  • Gold prices managed a gain of 1.4% last week to close just shy of USD 1,800/troy oz as inflation fears continue to spook markets.

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Written By

Edward Bell Head of Market Economics

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