Is Bad News Good News for the Euro?

Market Drivers October 24, 2019
EZ PMI’s miss
All eyes on ECB
Nikkei 0.55% Dax 0.60%
UST 10Y 1.75%
Oil $55/bbl
Gold $1489/oz
BTCUSD $7501

Europe and Asia:
EZ PMI Manufacturing 45.7 vs 45.7
EZ PMI Services 51.8 vs. 51.6

North America
EUR ECB Preseer 8:30
USD Durable Goods 8:30

The euro was whipsawed today by final EZ PMI data which first suggested a rebound and then a decline as all the figures tricked in.

The euro popped to 1.1163 off news that French PMI data showed a marked improvement with both Manufacturing and Services releases printing above the 50 boom/bust level. But the single currency quickly fell after the German data disappointed dragging the area-wide numbers down.

German Manufacturing PMI remained deep in recessionary territory coming in at 41.9 which was below the consensus forecast of 42.0. According to Markit, “New orders for goods and services fell for the second month in a row, the rate of decline easing slightly IHS Markit Eurozone PMI and GDP but nevertheless adding to the worst picture of demand since mid-2013 in recent months. The malaise was once again primarily a reflection of a steep deterioration of manufacturing business conditions, where factory output fell for a ninth successive month. The rate of decline was only marginally weaker than seen in September to indicate that the goods-producing sector remained in its deepest downturn since 2012, linked in turn to further steep falls in new orders and exports.”

The net takeaway from today’s data is that the deep recession in the German manufacturing sector is having negative spillover effects into the rest of the EZ economy and although France is offsetting some of the contractionary pressures, it’s becoming clearer by the day that Germans will need to expand their fiscal space in order to stabilize the situation. Whether the notoriously fiscally hawkish German authorities are willing to do that remains to be seen, but today’s weak data may have been the wake call for Berlin to act.

Today the market will also hear Mario Draghi’s final press conference who leaves after a ten-year term having preserved the EU monetary union through some of the most serious crises of the post GFC economy. Mr. Draghi has taken expansionary monetary policy as far as he can. At this point, the market does not expect any significant changes to the current QE program or any further cut to what is already some of the most negative interest rates in the OECD. Instead, Mr. Draghi is likely to pressure European fiscal authorities to expand their budgets and pave the way for his successor Ms. Legarde to push Europeans to a more aggressive fiscal stance.

Given the lack of policy options on the monetary front, the reaction in the euro could be minimal today. The pair remains above the 1.1100 figure for now and even today’s dour data had a silver lining within it in a sense that German Manufacturing demand has stopped contracting. So if Mr. Draghi reaffirms an expansionary monetary policy, the risk on flows in European equities could help push the euro higher as the day proceeds.