It’s been a bit of a thin week as far as truly impactful economic data are concerned. We kicked-off our high impact releases with weaker than expected retail sales data from Canada on Tuesday. The core reading was down -0.2% from last month’s 0% reading, as well as the market’s broad expectation of 0% for this month.
This was somewhat overshadowed by the headline-stealing Brexit votes in UK parliament. Having returned to the UK with a Brexit agreement after last week’s EU meetings, Prime Minister Boris Johnson was tasked with getting the new EU Withdrawal Agreement Bill through parliament, as well agreement for the Bill to be fast-tracked so that the UK could still withdraw from the EU before the October 31 deadline.
The first vote was passed, whereas the second, to fast-track Brexit before the deadline, was rejected. The sterling subsequently sold off from its 1.30 highs against the US dollar and is now trading at around 1.28.
EU Flash Manufacturing and Services
Thursday saw a number of highly-anticipated manufacturing and services data points from the Eurozone. French manufacturing PMI came in higher at 52.9, beating the market’s expectations of 51.6 and the previous reading of 51.6. Incidentally, this earlier reading was revised down to 51.1.
Similarly, French services PMI beat the market’s expectations of 50 by 0.5, with the previous report’s reading also having been revised down from 50.3 to 50.1.
Germany’s data was weaker. Flash manufacturing PMI came in at 41.9, in line with the market’s expectations of 42. Flash services PMI came in at 51.2, a significant drop from the market’s expectations of 52 and a 37-month low. We’re seeing continuing downward revisions in EU data with last month’s German Flash Manufacturing and Services PMI data both having been subsequently revised down.
The EU-wide figures also came in lower. Flash Services came in at 51.8, higher than last month’s reading of 51.6, but you have to take into account that this 51.6 figure was revised down from 52. Manufacturing hit 45.7, down from forecasts of 46.1. This is identical to last month’s reading after it had been revised slightly up from 45.6.
These data are extremely concerning, repeated PMI readings that are below 50 indicate contraction in these sectors. With Germany being Europe’s engine room and the fourth largest industrial nation in the world, a manufacturing PMI of 41.9 gives further credence to the case for it sliding into recession and dragging Europe along with it. The EU-wide reading of 45.7 isn’t much better.
But it’s not just the readings below 50 that are a concern. The downward revisions are also a reason to worry. As my colleague pointed out here, economic data tends to be revised down as an economy begins to slide. It also means that there’s a good chance that these current PMI readings will be revised down later, which means that the situation may be worse than it appears.
Yesterday’s ECB meeting offered little by way of surprises. The drama, what little of it there was to be found, was due to it being Mario Draghi’s swansong. Draghi, who has been at the helm of the ECB for eight years, will hand over the reins to the IMF’s former managing director, Christine Lagarde, on October 31st.
This marks the end of an era that stretches all the way back to the great recession where Draghi’s “whatever it takes” stance is credited with saving a euro on the brink of collapse. Draghi’s adoption of unconventional monetary policies, including dropping interest rates below zero and expanding the ECB’s balance sheet by some $2.6 trillion, flew in the face of German orthodoxy.
However, dissension has been rising within the ranks. In the previous meeting more than a third of the Governing Council voiced their opposition to the resumption of QE, which Draghi has put on the table again recently.
Whether or not history will credit Draghi’s moves as having saved the Eurozone, with an already ballooning balance sheet, negative interest rates and inflation at less than half of the ECB’s 2% target. Lagarde certainly has her work cut out for her.
The Week Ahead
Next week it’s crunch time in many ways. We have an important consumer confidence report out of the US on Tuesday. Then on Wednesday both the Bank of Canada and the Federal Reserve announce their interest rates. Fed funds futures are now giving a 64.7% probability that the Federal Reserve will cut rates by a further 25 basis points. This is followed on Thursday by the Bank of Japan’s Outlook Report and Monetary Policy Statement, as well as Canadian GDP data, and personal spending figures out of the US.
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