German Factory Orders Tumbled by 11.7% in July

Highlights

• German factory orders tumbled by 11.7% in July.
• The July report reflected weak demand across most sectors.
• Orders for motor vehicles, trailers, and semi-trailers bucked the trend, rising by 2.7%.

German Factory Orders

German factory orders were in focus this morning. After an unexpected 7.6% surge in factory orders in June, the weak demand environment suggested a sharp decline in July.

Factory orders slid by 11.7% in July. Economists forecast a 4% decline.

According to Destatis,

• Orders for the manufacture of other transport equipment slumped by 54.5% (June: +72.4%).
• Manufacture of computer, electronic, and optical products orders slid by 23.6%.
• There were also marked declines in orders for machinery (-8.7%), electrical equipment (-16.7%), and fabricated metal products (excl. machinery and equipment) (-14.2%).
• Orders for the manufacture of motor vehicles, trailers, and semi-trailers increased by 2.7%.
• Foreign orders declined by 12.9%, while orders from the euro area slumped by 24.4%.
• There were also falls in orders from the rest of the world (-4.1%) and domestic (-9.7%).

The latest numbers from Germany support rising expectations of a German economic recession. While bets on a September ECB interest rate hike have eased, ECB President Lagarde continues to raise concerns about high inflation.

Declines in the service and manufacturing sectors, combined with reduced factory orders, may prompt ECB hawks to reconsider rate hikes. Increased ECB interest rates would elevate borrowing costs, impacting firms’ margins, investment, and hiring targets.

EUR/USD Reaction to German Factory Orders

Before the factory order report, the EUR/USD fell to a pre-stat low of $1.07131 before rising to a high of $1.07386.

However, in response to the German factory orders, the EUR/USD fell from $1.07380 to a post-stat low of $1.07275.

This morning, the EUR/USD was up 0.08% to $1.07307.

Next Up

Eurozone retail sales will garner interest later today. Economists forecast retail sales to decline by 0.1%. A downward trend in retail sales would ease demand-driven inflationary pressures and ease pressure on the ECB to lift rates higher.

Given current inflation and interest rates, a weaker labor market could lead consumers to spend less, affecting consumption.

Following the latest euro area economic indicators, we expect ECB commentary to also influence ECB policy expectations. ECB Executive Board Member Elizabeth McCaul speaks today.

US ISM Non-Manufacturing PMI to Have the Final Say

The US ISM Non-Manufacturing PMI, crucial for market sentiment, follows PMIs from China and the euro area. A significant slowdown in the US service sector, which comprises over 70% of the economy, could unsettle markets. Economists predict the PMI to drop from 52.7 to 52.5 in August.

While other stats like the finalized S&P Global service, composite PMIs, and trade data are relevant, the ISM Non-Manufacturing PMI is expected to overshadow them.