French private sector activity contracted markedly in December, according to flash purchasing managers data released on Friday, confounding market expectations of little change from November's downbeat performance.

The flash composite PMI slumped to 43.7 in the final month of the year, a 37-month low. That's well below the consensus estimate of 44.9 and the unrevised November reading of 44.6.

Industrial activity continued to drag, with the manufacturing PMI falling to a 43-month low of 42.0, well below the consensus estimate of 43.2. The manufacturing output index declined to 40.8 from 41.0, and respondents reported reduced staffing numbers at industrial firms.

The service sector contracted even more dramatically, according to the flash data, with the PMI falling to 44.3 from 45.4 in November, well below the consensus estimate of 46.0, although respondents did report a marginal uptick in hiring at services companies. European Central Bank President Christine Lagarde on Thursday expressed concern that a strong eurozone labor market may be contributing to sticky domestic inflationary pressures.

The December data could suggest a weak performance for the fourth quarter, with the average composite PMI over the final three months falling to 44.3 from 45.8 in the third quarter, when gross domestic product declined by 0.1 percent.

With the big forecasting miss on the December PMI data, the French RPI moved negative 20 and the RPI-P to minus 12, meaning the economy has underperformed market expectations.

Continued deep contraction is expected for the manufacturing PMI which is seen at 43.2 in December versus 42.9, with services expected at 46.0 versus 45.4. The key composite output is expected to edge up to a still soft 44.9.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of around 1,000 manufacturing and service sector companies. The flash data are released around ten days ahead of the final report and are typically based upon around 85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The data are produced by S&P Global.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.