11/5/2015 Update: Overnight, we had some expected and some unexpected poor data from the Euro Zone.
The expected data came from the ECB’s downgrade to growth and inflation expectations for the Euro Zone. Growth was downgraded to 1.8% from 1.9% and 2017 inflation expectations were cut from 1.5% to 1.0%. This is the typical segway to ramping up speculation and provoking additional action from the ECB. First, say: “you need more time to assess the situation.” Then, release your guidance cuts, which shows you’ve assessed. Then, increase talk of action to the point that market expectations force your hand.
The unexpected data came from a 1.7% decline in Germany factory orders, when consensus was looking for a 1.0% gain. Over the past three months, that’s an annualized decline of 20%! The declines are led by an all out collapse in foreign factory orders. Bespoke argues the export data is muddied by the impact of the VW emissions scandal. While some blame may be attributable to VW, the declines started way before the EPA’s September announcement and the October data showed only a 2% decline in VW’s October sales SAAR vs. September. Regardless, of whether VW is the cause, the data is deteriorating much quicker than expected and those factory orders aren’t coming back.
Today was another vindicating day for Euro shorts! A combination of weak Euro macro data, very strong US macro data and all but an outright announcement of a December liftoff contributed to the 100bps+ decline.
I was reading one of my favorite macro blogs yesterday and was struck by the author’s claim that European macro data, while not outstanding, was still pretty strong. I was struck, because in my view, with the exception of France, the data: Exports, PMIs, inflation and unemployment – to name a few, is rapidly falling off a cliff. Draghi needs QE to be successful, so he’s got to do what every other central banker has done, do more QE and more of other things to kick the can further down the road.
Overnight European Data
Services PMIs are still squarely in expansionary territory, but volatility in compressing and the trend looks to be flattening out and poised to roll over. Whether the data will actually roll over or not is not as worrisome to Draghi as the mere appearance that it could.
Global manufacturing is in a rut, and Europe isn’t an exception. Weakness that appeared during the summer in Germany is spreading to the periphery.
Compared to when ECB QE was announced, composite PMI improvement has been underwhelming and begs the question: what would have happened without QE? Germany is down 2% from it’s post-QE announcement high, France is up 0.4% since the announcement and the broader Euro Area is essentially flat.
Switching to exports: Nominal growth is negative and accelerating to the downside everywhere – except France, which is nearly flat.
Weak export growth is echoed by the total collapse in producer prices, which are now re-testing pre-QE lows. While convention would argue that falling oil prices and Euro weakness are likely to have dragged down producer prices, softer commodity and FX prices should have also spurred export growth. Regardless of commodity/FX impact, this Summer’s sharp acceleration in producer price declines coupled with significant contemporaneous negative acceleration in exports, is very troubling.
These disinflationary pressures are flowing through into consumer prices. While CPI data shows a modest counter-trend bounce higher in early 2015 (ECB QE) the long established trend is to the downside. Moreover, recent data confirms that cyclical highs were already established this Summer and future risks are firmly to the downside.
Unemployment data (higher numbers indicate larger drop in unemployment rate) mirrors pricing and demand data, both in terms of QE’s limited impact and duration. Unemployment declines in the broader Euro Area, Germany and France maxed out in Summer 2013. Since then, the rate of decline in these unemployment rates has been flat, even after ECB QE. QE’s stimulus really only helped boost hiring in the periphery, as demonstrated by the recent acceleration in the rate of unemployment in Spain and Italy. These rates of decline are unlikely to persist in the periphery without additional easing measures, as employment cost differentials between the periphery and the core have sucked up demand generated by the first round of ECB QE.