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German factory orders, which had surged unexpectedly in June, took a sharp downturn in July. Thus, reflecting a troubling trend of weak demand across various economic sectors.
Factory orders in Germany plummeted by a staggering 11.7% in July. A stark contrast to the 7.6% surge witnessed in June. This unexpected decline far exceeded economists’ forecasts of a mere 4% drop, raising concerns about the country’s economic health.
Breaking down the numbers further:
- Orders for the manufacture of other transport equipment suffered a severe setback.
- Orders for computer, electronic, and optical products saw a substantial decline of 23.6%.
- Machinery orders dipped by 8.7%, while electrical equipment orders slumped by 16.7%.
- Fabricated metal products (excluding machinery and equipment) orders also decreased by 14.2%.
- In contrast, orders for the manufacture of motor vehicles, trailers, and semi-trailers managed a modest increase of 2.7%.
Notably, foreign orders took a hit with a 12.9% decline. While orders from the euro area tumbled by a substantial 24.4%. Domestic orders were not spared, experiencing a significant decline of 9.7%.
These disheartening numbers support the growing expectation of a German economic recession. While the likelihood of a September ECB interest rate hike has diminished, ECB President Lagarde remains concerned about high inflation.
The simultaneous decline in the service and manufacturing sectors, coupled with the slump in factory orders, may lead ECB hawks to reconsider their stance on rate hikes. An increase in ECB interest rates could have far-reaching consequences, affecting borrowing costs, corporate margins, investment decisions, and hiring plans.
EUR/USD Reaction to German Factory Orders
Before the release of the factory order report, the EUR/USD pair dropped to a pre-stat low of $1.07131, only to rebound to a high of $1.07386.
However, in response to the disappointing German factory orders data, the EUR/USD pair fell from $1.07380 to a post-stat low of $1.07275.
As of this morning, the EUR/USD pair has regained some ground, rising by 0.08% to $1.07307.
Next Up: Eurozone Retail Sales and US ISM Non-Manufacturing PMI
Later today, economists will be closely watching Eurozone retail sales, with forecasts suggesting a potential 0.1% decline. Such a downturn in retail sales could alleviate inflationary pressures driven by demand and reduce the pressure on the ECB to raise interest rates.
Considering the current state of inflation and interest rates, a weaker labor market could lead to reduced consumer spending, which would inevitably impact consumption trends.
Following the latest economic indicators from the euro area, market participants are eagerly awaiting ECB commentary, including remarks from ECB Executive Board Member Elizabeth McCaul.
On the other side of the Atlantic, the focus shifts to the US ISM Non-Manufacturing PMI, a crucial gauge for market sentiment. Given that the US service sector comprises over 70% of the economy, a significant slowdown in this sector could unsettle global markets. Economists anticipate a drop in the PMI from 52.7 to 52.5 in August.
While other statistics, such as the finalized S&P Global service and composite PMIs, as well as trade data, remain relevant, it is expected that the ISM Non-Manufacturing PMI will take center stage in market discussions.
Disclaimer: Please note that this article serves solely for informational purposes and should not be construed as financial advice. We strongly advise readers to conduct thorough research and consult with financial professionals before making any investment decisions
