Germany’s Factory Orders and Construction PMI Raise Yet More Red Flags

It was a relatively quiet start to the European session this morning. Following the November private sector PMIs on Monday, the German economy was back in the spotlight. Factory orders and construction PMI numbers drew attention as investors continued searching for bright spots in the German economy.

However, the German economic indicators were mixed, leaving investors to face more uncertainty over the economic outlook and ECB monetary policy.

German Factory Orders Beat Expectations but Failed to Impress

Factory orders increased by 0.8% in October, partially reversing a revised 2.9% fall from September. Economists forecast a more modest 0.1% rise.

According to Destatis,

• Excluding large-scale orders, factory orders fell by 1.2.
• Domestic orders declined by 1.9%, while foreign orders increased by 2.5%.
• Notably, new orders from the euro area rose by 2.6% and 2.5% from other countries.
• Capital goods producers saw a 3.2% jump in new orders, while the producers of intermediate goods recorded a 1.4% decline.
• Significantly, consumer goods orders tumbled by 6.3%.

The EUR/USD showed a mixed response to the numbers, falling from $1.04845 to a post-release low of $1.04764 before finding support.

While the numbers were better than expected, Germany’s November composite PMI sat at the bottom of the euro area table, despite a 3-month high.

The German Composite PMI rose from 45.1 to 46.3 in November, down from a prelim 46.4. A continued contraction in Germany’s manufacturing sector suggests October’s increase in factory orders is likely to be short-lived.

German Construction PMI Numbers Paint a Bleak Picture

While factory orders beat expectations, Germany’s construction PMI provided little comfort. In November, the German HIS S&P Global Construction PMI fell from 43.8 to 41.5. France reported a similar trend, where the PMI fell from 44.3 to 40.7, leading the Eurozone Construction PMI down from 44.9 to 43.6.

According to Germany’s construction PMI survey,

• Housing sector activity declined sharply, leading to a slump in construction activity.
• High inflation, rising borrowing costs, and customer apprehension weighed on sentiment across the construction sector.
• Construction companies reduced workforce numbers for the eighth month, driven by lower activity and the downward trend in new work inflow.

The EUR/USD was responsive to the headline PMI and sub-components, falling to a post-stat low of $1.04820 before finding support.

Following today’s economic indicators, the market focus will shift to the ECB. ECB members Luis de Guindos and Kerstin af Jochnick will speak today. While the ECB waits for the December projections, due in time for the final policy decision of the year, dovish chatter would test EUR support.

EUR/USD Price Action

At the time of writing, the EUR was down 0.03% to $1.04918. A mixed morning saw the EUR/USD rise to an early high of $1.05190 before falling to a low of $1.04758.

The US Session

It is a quiet day ahead, with US trade data and the Redbook in focus. However, barring dire trade data, we don’t expect either to materially impact the dollar or market risk sentiment.

The quiet session will allow investors to consider the latest round of economic indicators and other stats due ahead of the Fed’s next policy decision. Monday’s ISM Non-Manufacturing PMI should remove immediate fears of a US economic recession. But, the numbers, coupled with Friday’s Jobs Report, question the Fed pivot theory.

According to the FedWatch Tool, the probability of a 75-basis point December rate hike fell from 23.0% to 20.6% this morning. However, no FOMC members are influencing the reading. The Fed entered the blackout period on Sunday.