German Recession Fears Growing
German Data Drops Again
The latest data out of Germany this week has heightened fears over the Eurozone’s largest economy heading for a technical recession. Data released yesterday by IHS Markit showed weakness across all German PMI readings.
The worst of the readings for the German economy was the September manufacturing PMI which printed just 41.4 over the month. This was sharply below both the expected 44 reading and the prior months 43.5. The German Services sector PMI was also lower than expected though at 52.5 (vs 54.8 prior and 54.3 expected) was at-least still above the 50 line. The all-sector composite PMI however, moved into negative territory also, printing 49.1 vs 51.7 prior and 51.1 expected.
The manufacturing PMI reading shows German factory activity at its lowest levels of the last decade and makes for very bleak reading. German manufacturing which was once at the heart of the Eurozone export machine has weakened significantly over the last year. What started out last summer as supply-side constraints have quickly worsened into issues relating to the weak global demand environment. The European Commission’s indicators have flagged the role of weak demand as a limiting factor for production is at its most disruptive level since 2012. Additionally, with equipment and capacity utilisation rates also having fallen significantly, the prospect of a pickup in the near future seems very limited.
As a result of the ongoing slowdown in German, which was highlighted by the weak Q2 GDP print which saw German growth in contractionary territory, there is now a growing fear that Q3 will be weak also, confirming a technical recession in Germany. As such, there has been mounting pressure on the German government to announce new fiscal easing measures to tackle the issue and boost the economy.
Eurozone Data Weak Also
Looking at the broader eurozone data, the picture is just as bleak. The Eurozone PMIs for September, also released this week, showed severe weakness. The Eurozone services sector PMI printed 52 over the month, down from 53.5 prior and below the expected 53.2 reading. The manufacturing PMI echoed the weakness in German data printing just 45.6 on the month, vs 47 prior and 47.3 forecast. Meanwhile, the all-sector Composite PMI was able to just about hold in positive territory printing 50.4 vs 51.9 prior and 52 expected. All in all, the data is a very weak showing and will keep pressure on the ECB.
Commenting amidst the release of the latest weak data, Mario Draghi, head of the ECB, said that the eurozone is facing a period of “prolonged sag” and said that the ECB should be open to exploring new ideas such as Modernist Monetary Theory.
Technical & Trade Views
10YBUND (Neutral, Bullish above 177.35, targeting 180.83)
10YBUND From a technical and trade perspective. The recent pullback from highs offers the opportunity for longs to re-engage the market. Strongly above the yearly pivot and with longer-term momentum and sentiment indicators supporting there Is scope for higher prices. I will be monitoring price action if we move back above the monthly pivot at 177.35 looking to position on a retest for a move up to test offers around the monthly R1 at 180.83. On the other hand, if we fall lower from here I will look to reassess at deeper levels.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. The views discussed in the above article are those of our analysts and are not shared by Tickmill. Trading in the financial markets is very risky