Here Comes The European Triple-Dip: Negative German GDP Sends Bunds Under 1% For The First Time Ever

The hammer finally hit for Europe when overnight both Germany and France reported Q2 GDP prints that missed expectations, the first actually contracting at a 0.2% rate with consensus looking for -0.1%, while France remained flat vs expectations for a tiny 0.1% rise. As a reminder, this GDP is the revised one, which already includes the estimated contribution of drugs and prostitution, suggesting the actual underlying economic growth is far worse than even reported. Then again, this is hardly surprising considering all the abysmal data out of Europe and the rest of the world in recent weeks, and with the Russian trade war sure to trim even more growth, look for all of Europe to join Italy in its first upcoming triple-dip recession in history.

Goldman's take: Euro area GDP was flat in Q2 (+0.05 on a two-decimal basis), slightly below our and the consensus expectation of a more moderate positive expansion (Cons, GS: +0.1%qoq). The weaker-than-expected German and French GDP releases earlier this morning pointed to a flat or slightly negative area-wide GDP outturn. GDP contracted slightly or was flat in the major Euro area economies apart from Spain (where growth was robust). Eurostat releases the expenditure breakdown on September 3.

The first estimate of Euro area GDP for Q2 printed flat, following a +0.2%qoq (unrevised) reading in Q1. This outturn is marginally below our and the consensus expectation (made prior to the release of German/French data earlier today).
Today's GDP release does not contain an area-wide expenditure breakdown (due on September 3). The French breakdown is already available and showed weakness in investment, in particular construction, and net exports, while consumption was robust. The German statistical office hinted that the weakness in Q2 was also driven by weak net exports and investments. In particular, weather distortions owing to a mild winter boosting output temporary in Q1 likely weighed on construction spending in Q2 in Germany. German private consumption also appears to have expanded in Q2.
The country breakdown for Q2 GDP showed mixed, but overall weak, developments. German and Italian GDP contracted by 0.2%qoq, while French GDP was flat. Spanish Q2 GDP (released in late July), in contrast, grew robustly by +0.6%qoq. While German and Italian GDP showed similar surprisingly weak developments, we view the German Q2 weakness as reflecting weather distortions (owing to a warm winter) and temporary manufacturing weakness. We continue to view the short-term German outlook as solid (see here). The Italian outlook remains considerably less optimistic, although the Q2 GDP appears somewhat weaker than implied by the business surveys (see here). French GDP in Q1 was only marginally weaker-than-expected, while Spanish GDP was slightly stronger.
The Q2 GDP data for smaller Euro area countries were more encouraging. Dutch and Portuguese GDP expanded robustly by 0.5%/0.6%qoq, rebounding from a similar-sized decline in Q1. Small positive expansions were recorded in Belgium, Finland and Austria. There is no official growth estimate of Greek sequential GDP, but the improvement in year-on-year growth suggests positive GDP developments between Q1 and Q2. Irish Q2 GDP is not available as of yet.
Area-wide business surveys were more robust in Q2 compared with the weak GDP outturn. The Composite PMI averaged 53.4 in Q2, indicative of growth of around +0.4%qoq. Our Euro area CAI suggested 1.5% annualised growth in Q2. This implies that some weather-related weakness weighed on GDP in Q2, although there still appears to be some discrepancy between GDP in Q2 and the business surveys.

How odd this constant moaning about the PMI divergence: perhaps one should inquire about conflicts of interest, manipulation and/or general survey validity over at Markit. One can dream.

The release of weaker than expected German and French GDP data, which also consequently saw French finance minister slash 2014 GDP forecast to 0.5% from 1.0%, together with mixed set of earnings, saw Bunds edge higher since the get-go. The upside traction by Bunds saw the yield on the benchmark EGB print below 1.00% for the first time in history. Lacklustre growth, together with the ECB announcing that professional forecasters have downgraded their view on Eurozone HICP for 2014 and 2015 underpinned the likelihood of further policy easing in the block, which in turn prompted further peripheral bond yield spread tightening. Also of note, Short-Sterling curve continued its bull flattening bias as market participants continued to re-price projected rate path following the QIR yesterday.

Cautious sentiment dominated the price action in Europe this morning as market participants digested somewhat mixed set of earnings (RWE -3.10%, K+S -3.65% and ThyssenKrupp +1.26%). As a result, the more defensive sectors such as health care outperformed, while financials lagged on the sector breakdown. On the other hand, the FTSE-100 index outperformed and is the only major equity index to trade in the green, supported by the bounce back following yesterday’s ex-div driven weakness and also by real-estate sub-sector names after Land Securities (+1.31%) was raised to buy from hold at Bank of America.

Turning to overnight market action and in general markets are trading with a stronger tone, with Asian advances coming on the back of a strong day yesterday for US and European markets. Asian Credit markets are broadly tighter whilst the Nikkei and ASX200 are up around +0.74% and +0.71% respectively although the Hang Seng and Shanghai Composite are both trading slightly down as we type. In related news, overnight South Korea’s central bank cut rates for the first time since May 2013 in an effort to spur growth. Asian credit is broadly tighter across the board with the Itraxx Asia 0.6bps tighter. In other overnight news Israel and Palestinian representatives agreed to extend the current truce for five days as they continue to search for a broader accord, although it seems to two sides immediately traded fire. The US also announced that a rescue mission to those in Iraq trapped on Mount Sinjar was less likely after special forces visited the area and found there were fewer people there than expected and they were in better condition than thought. Also overnight the Ukrainian government has announced that it will now allow Russian aid supplies to enter the country if a number of conditions are met, including that the Red Cross distributes the supplies and their own customs officials check them (more on this later). Also overnight we learned of the death of Brazilian presidential candidate Eduardo Campos whose plane crashed in bad weather.

In geopolitical news yesterday Russia’s 280 truck aid convoy seems to be getting ever nearer to the Ukrainian border although quite how close is uncertain. Whilst previously having avowed to block the convoy the Ukrainian government’s views seem to have eased somewhat overnight as they announced they would allow the supplies in if the Red Cross distributed them. This comes as the UN reported yesterday that the estimated death toll in the conflict has almost doubled between July 26th and August 10th as the Ukrainian army seems to have made meaningful advances. In Iraq the Prime Minister Nouri Maliki continues to refuse to step aside to his appointed successor Haidar al-Abadi even as Iran joined the US in backing Mr Al-Abadi (Bloomberg news).

Focus turns to weekly US jobs and import price index for the month of July, earnings by Wal-Mart and Applied Materials, as well as the final auction by the US Treasury for this week.

Bulletin Headline Summary from Bloomberg and RanSquawk

Treasuries gain before $67b quarterly refunding concludes with $16b 30Y bonds; yield 3.245% in WI trading after drawing 3.369% in July, lowest since June 2013.
Germany’s 10Y yield fell below 1% for the first time on record as German GDP shrank 0.2% in 2Q; French data also showed the economy stagnated, prompting the government to scrap its 2014 deficit targets
French Finance Minister Michel Sapin said that European policy is partly to blame for the lack of expansion in Europe’s second-biggest economy
China’s plunge in credit expansion last month and unexpected slowdown in investment spending flashed warnings on growth that investors and economists bet will spur policy makers to expand stimulus
South Korea’s central bank cut its interest rate for the first time in more than a year, risking inflaming record household debt as it backs government efforts to spur Asia’s fourth-biggest economy
Banks including JPMorgan, Citigroup and Morgan Stanley have been notified regulators are preparing enforcement actions on currency rigging, people familiar with the investigation said
Cisco Systems Inc. is cutting 6,000 jobs and forecasting little to no revenue growth in the current quarter amid a slump in demand from phone and cable companies, and weakness in emerging markets
Greece’s economy contracted at its slowest pace in almost six years, adding to signs that the country is set for a 2014 exit from its deepest recession in half a century as it emerges from its debt crisis
Ukraine opened the door to a compromise over humanitarian aid arriving on hundreds of trucks from Russia, saying it could accept the supplies if the Red Cross distributed them in the nation’s war-torn eastern regions
Islamic State is attracting a growing number of militants from Southeast Asia to fight in Iraq and Syria, raising the risk they will return to carry out attacks in their home countries, according to a U.S.-based security consultancy
U.S. troops found fewer trapped civilians on a mountain in northern Iraq than expected, making it “far less likely” that the U.S. will conduct a rescue operation, U.S. Defense Secretary Chuck Hagel said
Israel and Gaza Strip militants agreed to extend a truce for five days as they attempt to reach a broader accord on disputes that fueled three major conflicts since 2008
Iraqi caretaker Prime Minister al-Maliki’s effort to remain in office was repudiated by his own political bloc, leaving him isolated after a similar rejection by the U.S., Iran and Iraq’s top Shiite cleric
Obama, amid three golf outings and a trip to the beach in his first four days on Martha’s Vineyard, is making sure to show people that he’s still at work by stepping before microphones to talk about Iraq and making six calls to world leaders about that and other global crises
The $1.4t U.S. high-yield bond market is looking cheap to a growing number of investors and strategists following a selloff that pushed yields to the highest levels since November
Sovereign yields higher. Euro Stoxx Banks +0.9%. Asian and European equities higher, U.S. stock futures gain. WTI crude and gold little changed, copper falls
Focus turns to weekly US jobs and import price index for the month of July, earnings by Wal-Mart and Applied Materials, as well as the final auction by the US Treasury for this week.

US Econ Docket

8:30am: Initial Jobless Claims, Aug. 9, est. 295k (prior 289k)
Continuing Claims, Aug. 2, est. 2.507m (prior 2.518m)
8:30am: Import Price Index m/m, July, est. -0.3% (prior 0.1%)
Import Price Index y/y, July +0.8% (prior 1.2%)
8:45am: Bloomberg U.S. Economic Survey, Aug.
9:45am: Bloomberg Consumer Comfort, Aug. 10 Supply
11:00am: Fed to purchase $1.6b-$1.9b notes in 2019-2020 sector
11:30am: U.S. to sell $16b 30Y bonds

FIXED INCOME

EQUITIES

EUR/USD recovered initial French and German GDP inspired weakness and moved into minor positive territory after the Euro-zone GDP number came in flat Q/Q and provided some relief to those expecting the worse after the weak German and French numbers earlier. Elsewhere, GBP/USD traded below the 200DMA line and at its lowest level in 4-months before recovering back to near the unchanged mark as the USD index moved lower amid short-squeeze in EUR/USD.

COMMODITIES

Gold has benefitted from the weak Euro-area GDPs, as the possibility of lower rates for longer and deflation concerns lead to inflows into safer-products. Also of note, global gold demand fell 16% in Q2, to 963.8 tons from 1,148.3 tons Y/Y, led by declines in demand in India and China, as jewellery purchases hit the lowest since the Q4 of 2012 according to the World Gold Council. Elsewhere, WTI and Brent traded lower amid lacklustre GDP reports out of Eurozone states.

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DB's Jim Reid concludes the overnight summary

Today the main focus will likely be the important European data releases with French, German and Euro area flash GDP all out this morning. After last week’s disappointing Italian GDP, all eyes will be on these numbers with BBG consensus expecting French Q2 GDP to come in at +0.1% QoQ (vs 0% in Q1), German Q2 GDP at -0.1% QoQ (vs +0.8% in Q1) and Eurozone at +0.1% QoQ (vs 0.2% in Q1). DB is expecting 0% QoQ growth for each. As DB’s Chief European Economists Moec and Wall wrote in last Friday’s Focus Europe, “a conversion to fiscal neutrality from aggressive budgetary retrenchment triggered the Euro area recovery in mid-2013. However, to propel the region’s growth annualized rate above 1% … accelerants are needed.”. (you can read the full report here http://pull.db-gmresearch.com/p/3066-DDE5/94051021/DB_FocusEurope_2014-0... [37]). It seems European growth and European budget deficits are doubly-tied together at present. On the one hand the easing of austerity in the middle of last year helped Europe return to growth; on the other any misses on growth are likely to make it much harder for countries to hit their budget targets and will likely lead to growing calls from the electorate for further policy easing. We’ve talked about our views on “secular stagnation” in previous EMR’s and its core view that for many developed economies their “normal” condition is now (and has been for some time) one of permanent demand deficiencies and in many ways the European economy’s post-crisis experience very much fits with such a view as demand has struggled to achieve anything like a normal cyclical bounce back and government austerity (here read subtractions from demand) increases/decreases have been closely tied with the growth off/on experience. On a related note yesterday we got Greek Q2 GDP data which fell -0.2% YoY vs -0.5% expected, its best performance since September 2008 and suggestive of a possible return to growth this year. Nevertheless Greek GDP is now almost 18% below its 2009 peak. Taken with Italian GDP 9% below its pre-crisis peaks and Spanish GDP 7% below it only goes to re-highlight quite how much damage the European periphery has suffered over the past 5+ years and quite how far away it is from a return to pre-crisis levels.

Yesterday was a reminder (if any were needed) of quite what strange times we still live in as markets were in bullish mood on the back of a string of weak data. In Europe, whilst the inflation readings all came in at broadly expected levels, Euro area June industrial production came in well below consensus and in negative territory at -0.3% MoM vs +0.4% expected. In the UK the unemployment rate fell another 0.1% to 6.4% in June however the June read on 3m-average weekly wage growth disappointed at -0.2% YoY vs -0.1% expected, its first fall since 2009. Growth excluding bonuses came in at +0.6%, its lowest rate since records began in 2001 (more on this later). Later in the day we got the weakest retail sales read in six months as July US retail sales came in at 0% MoM growth vs +0.2% expected. This slowdown in retail sales growth poses a challenge to those expecting another strong quarter of growth in Q3 and provides ammunition for those both within the Fed and outside of it arguing that the Fed shouldn’t rush into rate hikes.

These weak data points saw government bond’s rally with the 10Y Bund hitting new lows at 1.027% whilst the 10Y UST ended the day 3bps lower at 2.42%. European Credit also performed with iTraxx Main and Xover tightening 3bps and 16bps respectively. Thanks to these moves Main ended the day at its tightest close since the 30th of July, the day before Banco Espirito Santo announced its €3.6bn loss. In equity markets the DAX saw the best of European performance closing up +1.43% whilst the Stoxx 600 closed +0.39%. On the other side of the Atlantic the S&P500 and NASDAQ closed the day up +0.67% and +1.02% respectively with the NASDAQ now just 1.2% off its July YTD high.

We also had the Bank of England’s latest inflation report. The strength of the UK economy over the past year has pushed the BoE somewhat to the fore in terms of the first DM central bank to possibly hike. However it seems that yesterday’s weak wage data (Governor Carney referred to “remarkably weak“ wage growth) may have eased some of the tension. Indeed as DB’s Chief UK Economist George Buckley wrote yesterday, the Bank sharply cut its forecasts for wage growth, “from 2.75% to 2.50% and now 1.25% for 2014 in the three Inflation Reports this year, and from 3.75% to 3.50% and now 3.25% for 2015”. George highlighted that “the Bank expects – but not promises – to raise rates “gradually” and by a “limited” amount.” He continues to expect a first move in rates this November but notes that any further deterioration in European economic news, the global geopolitical situation or domestic wage pressures could lead him to push back this view.

Looking to the day ahead, beyond the already discussed European GDP releases, we have Euro area CPI (consensus is for -0.6% MoM) and the ECB will publish its monthly report. In the US we will get initial jobless claims (DB and BBG consensus is for 295k).