MARKET NEWS

(Bloomberg) -- Inflation in France and Spain plunged below 2% — fueling predictions by investors and economists that the European Central Bank will speed up the pace of interest-rate cuts.

Data Friday showed consumer prices in France rose 1.5% from a year ago in September — sinking below 2% for the first time in more than three years mainly due to falls in energy costs. Spain saw a similar trend, with inflation easing to 1.7% on fuel, power and food.

Analysts had expected readings of 1.9% for each country. A separate ECB survey showed consumers expect prices to rise more slowly over the coming years. 

Evidence of weakening pressures in Europe chimed with the release of the Federal Reserve’s preferred measure of inflation, which showed the smallest annual gain since early 2021.

Cooling consumer-price growth across the 20-nation bloc has allowed the ECB to lower its deposit rate twice this year, with most policymakers indicating that a gradual path down has begun. A surprise contraction in the private-sector economy, however, has boosted wagers that monetary loosening will soon be accelerated.

There were further signs of weakness Friday in Germany, where unemployment rose more than anticipated this month — signaling that another economic rough patch is having an increasing impact on the labor market.

A gauge of economic confidence for the euro zone, meanwhile, edged lower — staying roughly where it’s been since December — driven lower by industry and retail. Consumer confidence did tick up, as did services.

After this morning’s data, markets boosted bets on another quarter-point reduction in rates on Oct. 17, now pricing about an 80% chance of such a scenario. Analysts at Goldman Sachs and BNP Paribas also shifted their calls for October to a cut, as did Bloomberg Economics. HSBC did so earlier this week.

What Bloomberg Economics Says...

“Our base case has now been revised to call for an ECB rate cut in October. We previously expected policymakers to wait on further confirmation of disinflationary trends in the data before cutting borrowing costs in December — that confirmation seems to be arriving early.”

—Jamie Rush, chief European economist. Click here for full REACT

The ECB has warned, however, that price gains in the region will probably pick up again later this year, with the retreat back to target unlikely to be fully complete until late 2025.

Officials will get a clearer picture of the situation over the coming days. Italy and Germany are set to publish data for this month on Monday, and the euro zone will do so itself on Tuesday.

For the ECB, however, headline inflation numbers have been taking a back seat to readings of price pressures in the services sector, which exceeded 4% in August and are frequently cited by hawks as grounds for prudence when cutting rates.

France’s September data also showed a moderation in services, where inflation eased to 2.5% from 3%.

Bank of France Governor Francois Villeroy de Galhau has said the ECB should take a gradual approach to easing policy, being as careful not to undershoot as to overshoot the 2% target. The national central bank predicts inflation in France will slow sooner than in the euro area, reaching 1.5% in on average in 2025 after 2.5% this year

--With assistance from Joel Rinneby, Barbara Sladkowska, Rodrigo Orihuela, Aline Oyamada and Mark Evans.

(Updates with US inflation in fourth paragraph.)