In August, France’s manufacturing PMI increased to 50.4 from a preliminary 49.9, showing better manufacturing conditions after more than two years of decline. The sector experienced less severe contractions in total and new export orders since July, along with a slight boost in business confidence, although future expectations remain cautious. Employment in the sector unexpectedly rose, which helped improve the overall PMI. Even though demand and production have decreased, the situation is less serious than before, hinting at a possible recovery. However, this rise in employment is mainly due to temporary contracts.

Purchasing Volumes and Input Costs

Purchasing volumes have been falling for over three years, and delivery times have worsened, likely due to tariffs, which led to lower inventories. Input costs have spiked, mainly because of higher wages and raw material prices, forcing companies to rethink their inventory strategies. Despite these cost challenges, strong competition has made it difficult for producers to raise prices for consumers. The recent resolution of the US-EU tariff agreement has provided greater trade certainty and stability for businesses. The French manufacturing sector is experiencing its first sign of growth in over two years, which we see as a cautiously positive indication. With the PMI now above 50, traders should consider the CAC 40, which has struggled to surpass the 8,100 mark for a month, as ready for a potential short-term rally. We believe that buying near-term call options on the index could be a smart move for a positive market reaction in the coming days. However, we must balance this optimism with the fragile underlying details. The increase in employment is mostly due to temporary contracts, and companies are grappling with shrinking profit margins because of rising costs and strong competition. With Eurostat’s preliminary August inflation at 2.7%, these cost pressures are significant and might limit any major profit growth for businesses. This data could offer a slight boost for the euro, as France’s economy shows signs of stabilizing the broader Eurozone. We might see the EUR/USD pair testing recent highs, especially as it contrasts with some mixed data from the United States last week. However, the European Central Bank’s focus on data means a significant policy change is unlikely, which could restrict the euro’s gains.

Interest Rates and Market Volatility

The mix of slow growth and rising input costs makes it challenging for the ECB to consider lowering rates. We are monitoring short-term interest rate futures, as they might start to eliminate any lingering expectations of rate cuts by the end of the year. Recall how the market was overly optimistic in late 2023 based on similar data, so we anticipate the ECB will want to see a more sustained trend before taking action. Implied volatility in European stocks may decrease following this news since the main figure reduces some immediate economic uncertainty. Options on the VSTOXX, Europe’s main volatility index, have already seen implied volatility drop to a six-week low this morning. Selling some of this volatility through short-term options strategies could be appealing, but the fragility highlighted in the report means there is a constant risk of a sharp reversal. Create your live VT Markets account and start trading now.

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