(10 September 2019) DAILY MARKET BRIEF 2：EU data on the soft side
The latest batch of European data does not paint a bright picture of the economy. The first signs of weakness came from German
when manufacturing PMIs dropped below the 50 threshold and economic growth contracted in the second quarter. On the other hand, it seems
that the weakness was contained to Germany as France, Portugal and even Spain appeared surprisingly resilient. However, some cracks are
appearing in the other economies as well, especially in the industrial and manufacturing sectors. In July, Italy’s industrial production
contracted 0.7%y/y (versus +0.3% expected and -1.2% in June), France’s gauge fell -0.2%y/y (+0.5% exp. and -0.1% in June), while the German
one dropped 4.2%y/y compared to -3.9% forecasted and -1.1% in the previous month. However, this weakness may be due to temporary factors, it
is still too early to determine.
The market is waiting for the ECB bazooka stimulus that should be announced on Thursday. The recent weakness, together with the
collapse of inflation expectation - 5y5y swap rate fell to 0.99% compared to 1.59% at the beginning of the year – clear up any doubts that the
ECB will under deliver. We are convinced that the ECB announce the full package, i.e. 20bps cut to the deposit rate and a return to QE on
corporate and sovereign debt with substantial buying. Against such a backdrop, the euro should experience further weakness; while
equities should get a boost (one should remain careful with banks, though)..
By Arnaud Masset
