Wednesday December 3, 11:34 AM
UPDATE 2-Eurozone PMI plunges, pressure on for big ECB cut
By Nigel Davies
LONDON, Dec 3 (Reuters) - The euro zone's services economy fell deeper into recession in November than initially thought, adding pressure on the European Central Bank to cut interest rates on Thursday by more than the
50 basis points expected.
A key survey of euro zone companies also showed that inflationary pressures eased in the euro zone's dominant services sector, making it easier for the ECB to cut rates as widely predicted.
The Markit Eurozone Purchasing Managers Index for services companies, which covers banks to bars, plunged to 42.5 in November from October's 45.8 level, the lowest in the survey's 10-year history.
That was well below the preliminary flash reading of 43.3 and economists' forecasts and considerably below the 50.0 mark that divides growth from contraction.
The revisions will bolster those in the market who are forecasting the ECB to cut rates by more than the 50 basis points that most economists predict at its rate-setting meeting on Thursday.
Similarly, the UK PMI for the services sector shrank at its fastest pace in November since the series began in 1996, boosting expectations of a 100 basis point rate cut from the Bank of England on Thursday.
December bund futures hit a new contract high of 124.04 after the euro zone data, while yields on 10-year bunds fell to 3.0 percent. A move below 2.997 percent would be the lowest in the euro's lifetime. European stocks also extended losses.
'It is quite outstandingly low. There are record lows in all countries apart from Germany, and even Germany was down quite substantially,' said Juergen Michels at Citi.
'There is ample room for the ECB to cut rates ... We think 75 basis points will be the compromise, but we would not rule out a cut by 100 basis points,' he added.
Companies in both Britain and Germany complained it was still too hard and expensive to borrow in November -- despite official interest rate cuts and bank bailouts in both countries.
'A number of (German) service providers ... commented that financial market turmoil had led to shortages of working capital at client companies, which contributed to delays and the cancellation of new work,' Markit said in a statement.
Markit said the euro zone PMI pointed to GDP contracting by 0.4 percent in the final quarter of the year, a steeper rate of decline since the recession of the early 1990s.
Both the bloc's biggest economies reported weaker PMIs than forecast, with Germany's falling to 45.1 from 48.3, and the French PMI to 46.2 from 47.5.
BOLD MOVE FROM ECB?
All seven sub-indices of the euro zone PMI were revised lower from the flash estimate. That included prices paid and charged by companies after a month of further steep falls in oil prices.
Yet a sharp fall was not enough to convince most economists that the ECB will cut rates by more than 50 basis points without any warning as the bank is prone to do.
'If they were thinking of a bolder move, they would have flagged it, whereas we have heard from basically all speaking (Governing) Council members that they want to avoid the risk of remaining short of ammunition,' said Aurelio Maccario at UniCredit (Milan: UCG.MI - news) .
The slide in the services PMI, coupled with an ugly reading for the manufacturing sector released earlier this week, took the Composite index of the two down to 38.9, a new record low, from 43.6 in October.
And there is nothing to suggest that things may improve any time soon for the services sector. The services employment index fell to 47.9 in November from 48.4 the previous month, slightly lower than the flash and the fifth month of contraction.
Separate data showed euro zone retail sales fell much more than expected in October, underlining weak consumer demand in the 15 nation bloc.
(Editing by Ruth Pitchford) Keywords: PMI SERVICES/EUROPE
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