Key Takeaways

The final December 2025 Eurozone Services PMI was revised down to 52.4 from the preliminary 52.6, marking a three-month low. The Composite PMI also softened to 51.5 from 51.9 prelim. Despite the slowdown, the sector has now expanded for seven consecutive months. Crucially, input cost inflation accelerated to a nine-month high, driven by wage pressures, providing a key signal for European Central Bank (ECB) policy and trader positioning in the new year.

Dissecting the December Slowdown

The final HCOB Eurozone Services PMI for December 2025 confirms a modest cooling in the bloc's dominant economic sector. The dip from November's 53.6 to 52.4, coupled with a downward revision from the initial "flash" estimate, points to a loss of momentum as the year closed. The broader Composite PMI, which includes manufacturing, followed suit, falling to 51.5 from 52.8 in November.

The primary driver behind this easing was a slower rise in new business inflows. Demand growth for both goods and services across the euro area moderated, suggesting that consumer and business spending faced headwinds. This could be attributed to the lagged effects of prior ECB tightening, ongoing geopolitical uncertainties, or simply seasonal patterns. However, it's critical to view this deceleration in context: a PMI reading above 50.0 still indicates expansion. As HCOB noted, the sector remains "on a growth path," with firms continuing to increase staffing levels at a stronger pace—a sign of underlying confidence in the medium-term outlook.

Contrasting National Fortunes and the Inflation Puzzle

Beneath the eurozone aggregate, national divergences told a more complex story, particularly regarding inflation. The report highlighted stark contrasts between member states like Spain, where price pressures remained "hot," and France, where they were notably "colder." This divergence complicates the ECB's single monetary policy and creates nuanced trading opportunities in regional equity and bond markets.

Despite these national differences, the overall trend for input costs was unmistakably upward. The rate of input cost inflation across the services sector rose to its highest level in nine months. For traders, this is the single most important datapoint in the release. Services inflation is the ECB's primary focus, as it is intensely sticky and closely tied to domestic wage dynamics—precisely the "last mile" of the inflation fight.

What This Means for Traders

For active traders and investors, this PMI report provides several actionable signals across asset classes.

FX and Rates: Parsing the ECB's Path

The surge in services input costs directly validates the ECB's current cautious stance. President Christine Lagarde's mid-December emphasis on monitoring services inflation appears prescient. This data is a hawkish input that solidifies the expectation of a prolonged pause in the ECB's rate-cutting cycle.

  • Euro (EUR): The inflation components provide underlying support for the euro against currencies from central banks in a more aggressive cutting cycle (e.g., potential EUR/USD resilience on relative policy divergence). Watch for strength against the Swiss Franc (EUR/CHF) or Swedish Krona (EUR/SEK) if their central banks are perceived as more dovish.
  • European Government Bonds: Expect continued pressure on yields, particularly at the short to intermediate part of the German Bund curve. The data argues against pricing in imminent rate cuts, potentially leading to a bear steepener dynamic (longer-term yields rising relative to short-term).

Equities: A Sectoral Playbook

The report paints a clear picture of a two-speed economy: resilient services versus struggling manufacturing.

  • Long Services, Cautious on Industrials: Favor sectors like Technology Services, Travel & Leisure, and Financial Services that benefit from domestic consumption and wage growth. Remain selective on industrial and basic materials stocks, which are more exposed to weak manufacturing PMIs and global demand.
  • Labor Market Strength: The strong employment sub-index is positive for consumer discretionary stocks but also signals sustained wage costs, which could pressure margins for low-margin, high-labor businesses.

Macro Strategy Implications

The average Composite PMI for Q4 2025 was notably higher than in Q3, suggesting an acceleration in quarterly GDP growth. This underpins a "soft landing" narrative but with persistent inflation. Traders should position for:

  • Growth with Inflation Hedges: Consider European equity exposure paired with inflation-linked bonds (e.g., French OATi, German iBunds) as a hedge against the sticky services inflation.
  • Geographic Rotation: The national divergence (Spain vs. France) suggests looking for long opportunities in Spanish assets if growth holds, while French assets may offer value if their inflation cools faster, potentially allowing for earlier policy easing.

Forward-Looking Conclusion: The 2026 Trajectory

The December PMI is less a story of weakness and more one of normalization and persistent inflation. The services sector recovery gained meaningful momentum in the fourth quarter, providing a solid foundation for 2026. HCOB's projection of "moderate growth" in services, coupled with a potential manufacturing rebound driven by defense and infrastructure spending (notably in Germany), sets the stage for eurozone GDP growth potentially exceeding 1% in 2026.

For traders, the enduring theme will be the tension between this moderate growth and the stubbornness of services-led inflation. The ECB's hands are tied by the wage-price dynamics evident in this report. Consequently, monetary policy will remain restrictive for longer than many market participants hoped at the start of the 2025 easing cycle. This environment favors a selective, sector-driven approach in equities, a patient stance on rate-cut expectations in fixed income, and a euro supported by yield differentials. The final December PMI serves as a critical reminder that in the eurozone's journey to a post-inflation norm, the services sector—and the wages within it—holds the map.