DE30: German manufacturing deepens its sluggishness

Summary:

• German manufacturing PMI reaches its 84-month low in July, according to flash PMI data
• New orders, employment, stocks of purchases all of them fell at a faster pace
• Deutsche Bank shares dive after a company’s warning that lower rates will increase pressure on revenue

The euro has declined and the German 10Y bond yield has slid more than 3 basis points in response to disappointing manufacturing PMIs from major European economies. The Markit data increases the odds the ECB could pull the monetary easing trigger as soon as tomorrow, and will not wait for a fresh set of staff macroeconomic projections available in September. The market-based probability of a 10 bps deposit rate cut has risen following the PMI data and hovers slightly above 45% at the time of writing. It means that tomorrow’s ECB rate decision will be a toss-up bringing elevated volatility across financial markets. Anyway, the base case is still the ECB to hold rates unchanged and to promise substantial monetary easing, including a resumption of government bond purchases, in the fall.

Although services PMIs have been trending above the 50-point mark in recent months, manufacturing indices have been falling rapidly. Source: Bloomberg

Manufacturing PMIs from Germany and France failed to meet not demanding expectations in July, instead they dipped below the values seen in June with the German gauge reaching its 84-month law. Moreover, services PMIs also failed to compensate for a widespread disappointment in manufacturing as they declined as well. As a result, the manufacturing PMI index at the EMU level fell to 46.4 from 47.6 while the services PMI index dwindled to 53.3 from 53.6. What do the details of German PMIs look like? First and foremost, in July manufacturers saw new orders, employment and stocks of purchases falling at a faster pace. In addition to that, the main drag came from manufacturing order books falling at the fastest pace since April amid reports of lower export sales, to China in particular. The continued weakness in the automotive sector was also among the culprits. As far as price growth is concerned, July saw input price inflation easing to a near three-year low while output prices rose slower too. On the other hand, the services sector showed continued resilience producing a marked increase in business activity supported by domestic demand. At the same time, cost pressures in that sector remained elevated. This underlines the ongoing divergence between manufacturing and services which seems to be nowhere closer to disappear.

The DAX broke above the key resistance of 12 440 points. The next hours will be key for European stocks as the ECB meeting looms. Source: xStation5

After the first one and a half hours of trading the German DAX is rising 0.1% while other indices are experiencing modest declines. The euro is trading at 1.1136 against the US dollar at the time of writing of this analysis. Looking at some companies listed in the German stock market it is worth mentioning Deutsche Bank shares being down more than 4%. This downbeat result has come after the company reported sub-par earnings for the second quarter. Net loss in Q2 was 3.19 billion EUR compared to profit of 361 million EUR a year earlier. Overall revenue was 6.2 billion EUR. The company now sees 2019 group revenue lower than in 2018. On top of that, the German lender warned that lower interest rates would increase pressure on revenue. This communique came at a time when the ECB is setting the stage for even more negative rates, that’s why DB shares are plunging on Wednesday.

DB shares are leading the losses in the German index on Wednesday. Source: Bloomberg