Wednesday 21 August 2019

Daily Market Update: Stronger than expected German data provides a boost for the Euro


Richard Ramsey

Yesterday’s PMI releases revealed that business activity within the Eurozone accelerated in November to its highest reading since mid-2011.

The November print for the Composite PMI (manufacturing & service sectors combined) of 54.4 compared with 53.9 last month and an expected outturn of 54.0 according to a Bloomberg survey of economists. Remember with the PMI surveys 50 is the threshold between expansion (>50) and contraction (<50). The PMI suggests Eurozone GDP growth of 0.4 – 0.5% in Q4. The flash PMI estimates for the manufacturing and services sectors both exceeded analysts’ expectations with growth accelerating to 52.8 and 54.6 respectively. Germany was the main driver behind the marked pick-up in growth. Both the German services (55.6) and manufacturing (52.6) PMIs were higher than the most optimistic forecasts within a Reuters poll. This suggests the German economy is shaking off the Chinese economic slowdown and weathering the storm associated with the VW emissions scandal. Meanwhile the French composite fell to a three-month low due to a notable slowdown within the services sector. It is noted that some 60% of survey responses from companies within the services sector and just over half in the manufacturing industry were received after the terrorist attacks in Paris. This has clearly had a negative impact on footfall and consumer spending / sentiment.

The Eurozone PMIs are encouraging from the perspective of economic growth and job creation but not from an inflation perspective. The PMIs indicated that there is still no sign of inflationary pressures feeding through. As a result, the ECB is still expected to announce more monetary stimulus at next month’s policy meeting. However, the German representatives of the ECB Governing Council aren’t expected to support such action. ECB Executive Board member Sabine Lautenschlaeger said that the ECB shouldn’t undertake any further monetary stimulus measures for now, adding, “Data in the last few weeks indicate that the euro-area economy has so far shown itself to be resistant to uncertainty in the global economy.” Lautenschlager’s blunt public opposition is unusual as she is one of the six-person Executive Board. The latter is viewed as at the heart of the policy-setting and as such normally presents a united front.

The health of US manufacturing was also in focus yesterday with the Markit flash PMI. In contrast to the equivalent survey in the Eurozone, the pace of manufacturing activity slowed from 54.1 in October to 52.6 for November. The latter represented the weakest rate of growth since October 2013. Meanwhile in the US housing market, home resales fell last month by 3.4%. Despite this decline the housing market recovery remains on a solid footing and is still on track for its best year in 8 years. Today we get the latest S&P / CaseShiller house price survey (Sep) alongside the Conference Board’s latest consumer confidence survey. Consumer sentiment fell unexpectedly in October with analyst’s penciling in a partial rebound for November. However, the key release in the US will be the latest estimate of Q3 GDP. The pace of US economic growth is expected to be revised up from 1.5% to 2.1% on an annualised basis. In the UK there is a lack of top tier economic data. The main focus in the UK will be Governor Mark Carney’s appearance in front of Westminster’s Treasury Select Committee. The Bank of England Governor will be accompanied by a number of his MPC colleagues. The hearing is focused on the latest Quarterly Inflation Report.

Yesterday’s encouraging Eurozone PMI data has been followed up by further signs of improvement within the German economy. The better than expected trend from yesterday’s German PMI extended to this morning’s IFO survey. The poll of business analysts signaled an improvement in the current assessment component, which recouped some of October’s surprise fall. More encouraging, however, was the pick-up in the forward looking expectations component. It has improved for the third month in a row and is now at its highest level since May 2014. The recent run of better than expected German / Eurozone data has helped the single currency regain some of its recent losses. EUR/USD is up from $1.062 to $1.0650 over the last 24 hours. Meanwhile EUR/GBP has gone from 70.1p to 70.5p over the same time period.

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