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 / 23 January 2014 at 11:55 GMT

Strong European PMIs suggest growth in Q1

Blogger / MoreLiver's Daily

• Strong PMIs imply 0.5% GDP growth for Eurozone in Q1
• France steadies ship, Germany improves on ex-EU trade
• Periphery improvement eases pressure on ECB

Markit’s flash purchasing manager indices (PMI) for January show promise and strength for the early 2014. While weaknesses remain, especially in France, the overall picture is looking brighter. Expectations were not running terribly high, as the Chinese PMI published overnight fell below the 50-level against expectations for the first time in six months. See Markit’s statement for more on that.

pmi table
Source: Saxo Bank

France’s PMI was out first, exceeding expectations, although still below the 50-level. Thus, while the French economy is still showing no signs of growth, at least the negative trend seems to be losing momentum. Forward-looking components remained weak, implying that a turnaround in the first quarter is out of the question.

Germany’s data also surprised positively, with the manufacturing sector particularly strong, but the service sector was slightly below expectations. Note that the improved industrial activity was said to emanate from outside the European Union. It is good for Germany that it has become less reliant on European demand, but is obviously not happy news for the rest of the Europe.

Eurozone’s data was also strong, and even the crisis countries are showing clear improvement. The manufacturing sector’s higher reading indicate that reliance is on a export-led recovery, and with the debt overhang and high unemployment, it is understandable that internal demand and service sector activity remains capped.

The divergence between the German and French data remains historically very high, and is also a political problem, as the old Franco-German alliance has effectively broken down due to the economic divergence between the two countries. With support for further federal processes in Europe waning, weaker consensus between the two countries is even more troublesome.


German strength allied to French weakness is threatening the consensus that has underpinned the whole European unification project. Photo: Fingerhut \

EURUSD shows strength, ECB action postponed

EURUSD moved higher after the French and German data releases. That suggests to me that sentiment on the EURUSD had become too negative, and the medium-term strength of the pair, based on continued tight monetary policy and a strong current account balance in the Eurozone should not be overlooked. With the improved outlook for growth, there will be less pressure on the European Central Bank to ease its policy further.

As conventional monetary policy options have been mostly exhausted, the hurdle to go further remains high, with negative rates, new LTRO or direct asset purchases all being at least somewhat questionable options, or at least opposed by some of the countries. With Germany’s economy showing no signs of easing up, Germany will not allow further easing in the foreseeable future.

The German Ifo index will be out next Monday, and the country-level PMI indices later will be of particular interest now. Spain and Italy’s numbers stand out a ones to watch. The European Central Bank will be meeting on February 6.

 EURUSD longer
Source: Saxo Trader

eurusd 30min
Source: Saxo Trader

eurusd 1min
Source: Saxo Trader


Markit press releases:

France: Slower fall in French output at start of 2014

Weakness in the French private sector persisted in January, with output falling further, albeit at a reduced rate. Moderate falls in new orders, employment and backlogs of work were also recorded, in each case across both the service and manufacturing sectors, pointing to a general softness that seems to show little sign of lifting.

Meanwhile, contrasting trends in input and output prices were recorded, with the gap between the survey’s respective indices widening to the largest in nearly three years, as strong competitive pressures eroded firms’ pricing power and prevented the pass-through of higher purchasing costs to clients.


Germany: Business activity rises at sharpest rate in over two-and-a-half years

Germany’s private sector continued to hit high notes at the start of 2014, expanding at the quickest pace since June 2011. Manufacturing was a particularly bright spot, with companies reporting sharp and accelerated growth of output and new orders.

Stronger demand in the goods producing sector was attributed to higher business intakes from both domestic and foreign markets, with non-EU countries noted as a source of growth.

The latest rate of job creation slowed to a three-month low, however, sending a somewhat mixed signal about the speed of the economic upturn. Nonetheless, with workforce numbers increasing for a third month in succession, levels of unfinished work rising further and new business increasing markedly, the German private sector seems set to maintain its growth momentum in the coming months.


Eurozone: PMI hits highest since June 2011, signaling strengthening economic recovery

The eurozone’s recovery gained further momentum in January. The upturn in the PMI puts the region on course for a 0.4-0.5% expansion of GDP in the first quarter, as a 0.6-0.7% expansion in Germany helps offset a flat-looking picture in France. Elsewhere across the region growth has improved to its fastest since early-2011, meaning the periphery is showing clear signs of starting 2014 on a firm footing.

However, while gathering pace, the upturn remains fragile. Companies cut employment again, and selling prices continued to fall amid still-weak demand. Deflationary forces are clearly a concern in many countries.

The growth disparities are also a persistent concern. We are seeing growth being led by Germany, especially its surging manufacturing sector, while France looks likely to act as a drag on the eurozone recovery for some time.


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