Eurozone manufacturing growth accelerated to a four-year high of 52.9 in September, driven by robust demand for capital goods and rising exports. According to The Economic Times, the S&P Global Eurozone Manufacturing Purchasing Managers' Index (PMI) rose for a third consecutive month to 52.9 from 52.7 in August, marking the highest level since May 2022. The improvement was driven particularly by stronger demand for investment goods, including machinery and equipment, with capital-goods production recording its strongest expansion since the post-pandemic rebound. Export growth reached its highest level in more than four and a half years, further supporting the manufacturing recovery. Factory output also strengthened, with the output sub-index climbing to 53.6, its highest level in 55 months, helping lift business confidence to its strongest level since February.
France's bond yields have experienced their most dramatic surge in nearly four decades, with the 10-year yield climbing 66.5 basis points in September alone - its biggest monthly increase since late 2022. According to Reuters, French government bond yields climbed to a fresh 18-year high after recording their biggest quarterly increase in nearly four decades, highlighting growing investor concerns over the country's fiscal position. Since the beginning of July, the yield has risen 119 basis points, putting it on course for its largest quarterly jump since 1987. The government faces additional pressure as it plans to sell a record €340 billion of bonds next year, with interest expenses now projected to be €5 billion higher in 2026 and €7 billion higher in 2027 than forecast a year ago. As Charlotte de Montpellier, senior economist at ING, noted, "Higher interest rates are therefore becoming a source of fiscal deterioration, making it even more difficult to stabilise public debt."
Germany's benchmark 10-year government bond yield was up 1 basis point on Thursday, having reached 3.6526% on Monday, its highest level since June 2009, and ended the third quarter around 71 basis points higher. According to Reuters, Germany's more policy-sensitive two-year yield rose 1.5 basis points to 3.21%, having touched 3.3276% on Monday, its highest level since September 2023. The two-year yield rose about 66 basis points during the third quarter, its largest quarterly increase since the final quarter of 2022. Money markets are now pricing the ECB's deposit rate at around 2.81% by December, implying one 25-basis-point rate increase and assigning a 24% probability to a second move. Markets also price the policy rate at around 3.42% by late 2027, compared with the current 2.50%.
Central banks are pushing back against aggressive rate expectations as policymakers signal they are not necessarily in a rush to raise interest rates further. As reported by The Economic Times, rising inflation expectations have also strengthened market expectations of further monetary tightening by the European Central Bank. Markets are currently pricing in three ECB rate increases by mid-2027, up from previous expectations. ECB policymaker Peter Kazimir similarly said the European Central Bank had room to remain flexible after raising rates twice this year, following remarks from ECB President Christine Lagarde on Monday that pointed to a cautious approach to future policy decisions. In the United States, New York Federal Reserve President John Williams indicated on Tuesday that policymakers had time to assess incoming economic data before determining when another rate increase might be warranted. The rise in yields has been driven in part by expectations that the ECB may need to keep monetary policy tighter for longer as energy costs threaten to push inflation higher.
Inflation accelerated sharply across major eurozone economies in September, with France's harmonised inflation rate rising to 3.4% from 2.6% in August, while Italy's increased to 4.1% from 3.2%. According to The Economic Times, official inflation data due on Friday is expected to show eurozone consumer inflation accelerating to 3.6% in September from 3.2% in August, marking its highest level since September 2023. Both input costs and factory-gate prices rose faster in September, suggesting inflationary pressures are building again. The rise in yields has come as soaring energy prices have intensified concerns that inflation could remain sticky, while strong investment linked to artificial intelligence has raised expectations for economic growth and potentially reduced the urgency for central banks to cut borrowing costs. Eurozone inflation has already moved above 3% and could approach 4% by the end of the year, increasing pressure on the ECB even as policymakers remain wary of the impact of tighter financial conditions on growth.
Borrowing costs have climbed even more sharply in some of the euro zone's more fiscally vulnerable economies, with France's 10-year yield climbing 66.5 basis points in September, its biggest monthly increase since late 2022. According to Reuters, the spread between French and German 10-year government bond yields, a key measure of the premium investors demand to hold French debt, stood at 127.51 basis points, having widened to 128.80 basis points earlier, its highest level since June 2012. Italy's 10-year yield spread over German Bunds also widened to 104.15 basis points, its highest level since June 2025, underscoring the broader pressure on eurozone government debt markets. Higher borrowing costs have renewed scrutiny of fiscal sustainability across the euro zone, particularly in countries carrying large debt burdens, with political uncertainty ahead of elections in 2027 adding to concerns about the trajectory of public finances in France and Italy.
