(13 AUGUST 2019) DAILY MARKET BRIEF 1：German economy facing difficult times

The single currency has remained quite robust lately despite internal shocks including Italian government discord, Brexit headlines or poor economic releases from major economies of the single market. In this regard, global political and economic turbulences continue to weigh heavily on the German economy, which recently released a series of negative figures and is expected to provide a batch of disappointing GDP data on Wednesday. Therefore, the situation remains rather gloomy for the single market as trade tensions between the US and China don’t seem to reduce while trade talks initially set for September could well be cancelled. Overall, it seems that many arguments are favoring further EUR depreciation although July CPI in the US should also play a major role short-term.

The recent data releases in Germany confirm that a recession is nearing further. German industrial production is pointing at November 2009 low, given at -5.20% in June, a drop of an additional 1.50% from prior month, confirming that the impact of current trade slump is being felt. In a similar fashion, Manufacturing PMI for the month of July also continues its downward trend towards 43.2, in contraction territory since January 2019. On the trade side, the situation is alarming as June year-on-year exports and imports fell by respectively 8%, the strongest decline since mid-2016, and 4.40%. In this backdrop, 2Q GDP data released tomorrow should also disappoint and confirm a slowdown to 0.10% (prior: 0.70%) year-on-year and -0.10% (prior: 0.40%) quarter-on-quarter, thus questioning German government growth forecast of 0.50% for 2019 which is likely to be reduced slightly. Meanwhile, the room of maneuver of Germany’s fragile coalition is limited as the German debt brake (“Schuldenbremse”) mechanism only allows for an adjusted deficit of 0.35% of GDP per annum, worth a little more than EUR 11 billion, a small figure considering upcoming challenges that the country is expected to face by 2020 if the global outlook doesn’t improve by then. The heavy reliance on external trade of the German economy is yet not an isolated case, albeit it clearly confirms that major Eurozone countries continue to struggle, therefore confirming that there is little upside potential for the single currency at current, without considering the ECB limited leeway when it comes to monetary easing.

EUR/USD should stay highly biased towards US CPI released later today short-term while the EUR longer-term outlook is rather gloomy. EUR/USD is heading along 1.1185 short-term.

By Vincent Mivelaz