Overnight Sentiment Improves On Record Eurozone Unemployment, 14th Consecutive PMI Contraction
After dropping to its 200 DMA, and threatening to breach its recent support level of 1.2800, the EURUSD has seen the usual powerlift over the past 4 hours, on two key events out of Europe: Eurozone unemployment, which came at a record 11.4%, up from 11.3% (which just happened to be revised to 11.4%) but because it was in line with expectations of the ongoing recession, all was forgiven. The other event was Eurozone manfucaturing PMI, which rose by the smallest amount possible from the 46.0 in August to 46.1, on expectations of an unchanged print. That 0.1% "beat" is what has so far set off a near 100 pip rush higher in the EURUSD, which has ignored the Chinese weakness overnight (the SHCOMP is closed for the Chinese Golden Week), as well as the UK PMI which did not share in the European "improvement" and tumbled from 49.5 to 48.4 on expectations of a 49.0 print (so much for that latest BOE easing), and instead is transfixed by headlines proclaiming the strongest PMI in 6 months. What also is being ignored is the components in the Eurozone PMI, with the leading New Order index falling to 43.5 from 43.7. But the data being ignored the hardest is the French PMI which tumbled to 42.7, the lowest print in 41 months, of which as MarkIt's chief economist Chris Williamson said "France is perhaps the new worry, with its PMI slumping to the lowest for three-and-a-half years." Coming at a 3+ year low when France desperately needs its new wealth redistribution budget to be credible, is not the best possible outcome. Bottom line: Europe is in a recession, but maybe not outright depression just yet, so the thinking is - buy the EUR, strengthen the currency, make German exports weaker, and make sure the recession becomes a full on depression. Or something like that.
Breakdown of notable September PMIs:
Elsewhere, from Reuters:
Euro zone manufacturing put in its worst performance in the three months to September since the depths of the Great Recession, with factories hit by falling demand despite cutting prices, a business survey showed on Monday -- pointing to a new recession.
Factories helped lift the 17-nation bloc out of its last recession but the survey suggests a downturn that began in smaller periphery countries has taken root in core members Germany and France.
"Despite seeing some easing in the rate of decline last month, manufacturers across the euro area suffered the worst quarter for three years in the three months to September," said Chris Williamson, chief economist at data collator Markit.
"The sector will act as a severe drag on economic growth. It therefore seems inevitable that the region will have fallen back into a new recession in the third quarter."
Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 46.1 in September from 45.1 in August and above the preliminary reading of 46.0. But that was its 14th month below the 50 mark that divides growth from contraction.
The output index rose to 45.9 from August's 44.4 but chalked up its seventh month of decline.
Perhaps most important is that while the overall PMI may have printed the highest number in 6 months, the export index by country from 6 months ago shows that Europe is now virtually no longer exporting.
Some more charts from SocGen:
There were few surprises in the final manufacturing PMIs for September with the headline figure revised up a fraction to 46.1 from 46.0 in the previous flash estimate. As such, the euro area index recorded its second 1.1ppt increase in a row. Undoubtedly, the ECB’s bond purchase programme boosted sentiment. However, the business confidence indices remain low and potentially point to another step down in activity going into Q4. As such, we expect euro area GDP to decline by 0.2% q/q in Q3 and Q4. PMI surveys also underscore the potential downward divergence from the French manufacturing sector. In the UK, the PMI showed a minor downtrend in UK manufacturing output while lending figures remained weak in August, holding back the recovery.
In Germany the headline manufacturing index was revised up by 0.1ppt and posted its biggest one month increase since the start of the year, rising to 47.4 from 44.7 in August. In Italy, the PMI rebounded by 1.9ppt to 45.7, a six-month high. Business conditions continued to worsen in Italy, but at a slower pace. In Spain, the business confidence index rose to 44.6 from 44.1 but new orders suggest domestic demand remains on a steep downward trend owing mainly to the adverse impact on economic activity from the VAT tax hike in September.
France’s manufacturing sector takes a hit
In complete contrast, activity in France fell sharply. The manufacturing PMI fell 3.3 points to post its biggest-ever one month decline. At 42.7 in September, the French manufacturing PMI even fell below the Spanish and the Italian levels, well below the critical 50 level that points to expansion. The Markit report suggests that the main weakness in demand was from the domestic side. It is tempting to ascribe the precipitous decline in sentiment in France to concerns about the austerity measures just announced by the government that will lead to a 27% increase in corporate taxes.
However, new export orders also contracted sharply to 44.7 from 48.3 while, in contrast, manufacturing export orders recorded a healthy rise in Germany, Spain and Italy. If confirmed in the coming months, it would suggest that French poor competiveness issues are once again deteriorating.
It is probably too soon to make a trend from a PMI survey that has proven pretty volatile in the past (and more volatile than the INSEE or the Bank of France surveys), but the risk is that France manufacturing sector falls apart in the euro area.
Minor downtrend in UK manufacturing output
The UK manufacturing PMI dipped to 48.4 in September from 49.6 (revised marginally up by 0.1ppt) in August). Details of the survey contain little to get excited about. The good news was that new orders edged up from 50.2 to 50.6 whilst export orders remained soft at 48.1 after 48.8. The geographical breakdown showed weaker demand from EU and Asia but some pick-up in the US and the Middle East. The output index fell from 48.7 to 47.6 and the stock of purchases fell a lot from 49.6 to 45.0. Overall, the report does not change our view of a minor downtrend in output.
As for European record unemployment...
— Unemployment across the 17 countries that use the euro remained at its record high of 11.4 percent in August, official data showed Monday, renewing concerns that efforts to slash debts have sacrificed jobs.
While European leaders have managed to calm financial markets in recent months with promises to cut spending and build a tighter union, they have been unable to halt the rising tide of joblessness.
In August, 34,000 more people lost their jobs in the eurozone, according to data released Monday by the European statistics agency, Eurostat. The unemployment rate — the highest since the euro was created in 1999 — is the same as July's, which was revised up from 11.3 Monday.
Economists note that the very spending cuts that are intended to ease the financial crisis by lowering public debt are what's pushing unemployment higher and threatening the continent with recession. Some experts urge leaders to instead loosen spending to encourage growth.
But many European countries — like Greece, Spain and Italy — have very little room in their budgets for such a stimulus. Greece, for instance, is already relying on a European bailout to pay its bills — and its rescue creditors are pushing for more cuts, not spending.
Greece and Spain have the highest unemployment rates in the eurozone, around 25 percent for both.
That alone should be good for another 50 pips in the EURUSD. Because there is nothing like a stronger currency to help you cut unemployment.