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Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 21 February 2013 at 11:59 GMT

The recession in Europe continues

Blogger / MoreLiver's Daily
Finland

The European morning started with the French PMI (see the Markit press release here). The manufacturing component increased from last month’s 42.9 to 43.6 (versus a forecast of 43.8), so it was no surprise even though it is clearly below the 50-level and a sign that the manufacturing sector continues to contract.

The service component was worse than expected – it decreased from last month’s 43.6 to 42.7 (versus a forecast of 44.5), leaving the PMI was somewhat worse than expected as the contraction continues and there are no signs of improvement in the near future.

The number also confirms fears that France is not really a “core” country in the Eurozone – the PMI is at a four-year-low.  

Market reaction: the EURUSD dropped on the news, while the “Europe is broken” excuse was good enough to continue the Fed-induced selling from last night, especially ahead of the Italian elections.

German PMI followed (see the Markit press release here). The manufacturing component increased from last month’s 49.8 to 50.1 (versus a forecast of 50.5) - a slight negative surprise and too close the 50-level for comfort. The service component decreased from last month’s 55.7 to 54.1 (versus a forecast of 55.4), also a slight negative surprise. The forward-looking numbers for manufacturing were okay, though – giving us a promise of some GDP growth in the first quarter.

Market reaction: EURUSD dropped some more.

Eurozone PMI  (see the Markit press release here) was the last on Europe. The manufacturing component was almost unchanged at 47.8 (versus a forecast of 48.5), while the service component decreased from last month’s 48.6 to 47.3 (versus a forecast of 49).

Market reaction: The EZ-level data did not add anything new to the big picture – the divergence between Germany and the rest of Europe has been made clear earlier and a deepening of the rift was already confirmed by today's earlier releases.

Technically, EURUSD is near critical levels. I think the news flow can hardly get any worse now for the pair – but no longs before a base forms.

EURUSD post-PMI

Key outtakes from the Markit’s press releases:

FRANCE Jack Kennedy, senior economist / Markit

The performance of France’s private sector economy deteriorated further in February, as a sharper fall in services activity offset a slight easing of the downturn in manufacturing. Following on from the news that GDP contracted -0.3% in the final quarter of 2012, PMI composite output data suggest that the first quarter is shaping up to be the worst since Q1 2009. The broad-based weakness across manufacturing and services leaves scant room for optimism, with a range of indicators from new orders, backlogs, employment and output prices all residing at depressed levels.

GERMANY Tim Moore, senior economist / Markit

The early snapshot of February PMI data highlights that Germany remains on track for a return to GDP growth over the first quarter of 2013. Despite the slight loss of momentum since January, the survey suggests that Germany can still be relied upon as an engine of growth for the Eurozone. Higher levels of services activity underpinned the overall rise in output during February, but there are positive signs ahead for manufacturing growth. Intakes of new export work rose at the steepest pace for almost two years, boosted by stronger demand from Asia, while lower stocks and a build-up of backlogs in February also bode well for production volumes in the months ahead.

EUROZONE Chris Williamson, chief economist / Markit

A steepening rate of decline in February is a disappointment, and suggests that the Eurozone is on course to contract for a fourth consecutive quarter in the first three months of the year. However, despite the fall in the PMI, the first quarter decline in the economy should be less severe than the 0.6% drop in GDP seen in the final quarter of 2012, with a contraction of 0.2-0.3% looking likely. Digging into the data shows increasing schisms within the Eurozone. National divergences between France and Germany have widened so far this year to the worst seen since the survey began in 1998. Germany is on course to grow in the first quarter, recovering from the 0.6% GDP fall seen in the fourth quarter, possibly expanding by as much as 0.4%. In contrast, Frances’s downturn is likely to deepen, bringing the Euro area’s second-largest member more in line with the periphery than with the now solitary-looking German ‘core’.

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