Forex Snapshot: The Euro Zone

Greetings, forex friends! Pip Diddy noted in his latest Top Forex Market Movers of the Week that the euro was getting slapped around by most of its forex rivals. And if that made ya wonder how the euro zone’s underlying fundamentals are faring, then I’ve got your back.

Note: If you’re a forex trader who’s in a hurry, you can just skip to the nifty tables which, well, tabulates everything at the bottom, but I highly recommend going through the details of the “Business Conditions & Sentiment” portion since the PMI report also acts as a leading indicator for other economic indicators (e.g. employment and inflation).

Growth

  • These are the preliminary readings, so no breakdown for GDP components.
  • Q4 2015 grew by 0.3% quarter-on-quarter, which is the same pace as the previous quarter.
  • Year-on-year, this translates to a GDP growth of 1.5%, a downtick from the previous quarter’s 1.6% expansion.
  • As of 2014, Germany (28.84%), France (21.84%), Italy (15.96%), and Spain (10.30%) account for most of the Euro Zone’s GDP.
  • Readings for the major euro zone economies are as follows:
    1. Germany: grew by 0.3% q/q (0.3% previous), grew by 1.3% y/y (1.7% previous)
    2. France: grew by 0.2% q/q (0.3% previous), grew by 1.3% y/y (1.1% previous)
    3. Italy: grew by 0.1% q/q (0.2% previous), grew by 1.0% y/y (0.8% previous)
    4. Spain: grew by 0.8% q/q (0.8% previous), grew by 3.5% y/y (3.4% previous)
  • Next GDP report: March 8 (final Q4 readings)

Employment

  • Unemployment in the euro zone ticked lower to 10.4% from 10.5%.
  • This is the lowest rate ever since September 2011.
  • This also marks the sixth consecutive month that the jobless rate has been dipping lower.
  • Seasonally adjusted harmonized readings for the major economies are as follows:
    1. Germany: 4.5% vs. 4.5% previous
    2. France: 10.2% vs. 10.1% previous
    3. Italy: 11.4% vs. 11.3% previous
    4. Spain: 20.8% vs. 21.4% previous
  • Next jobs report: March 1 (February period readings).

Inflation

  • This is the final inflation reading for January 2016.
  • The headline reading for the entire euro zone’s Harmonized Indices of Consumer Prices (HICP) dropped very hard (-1.4% vs. 0.0% previous) on a monthly basis.
  • On an annualized basis, it ticked higher to 0.3% (0.2% previous), the highest level ever since May 2015, which speaks volumes on the Euro Zone’s inflation problems.
  • However, it was revised lower from the 0.4% increase reported during the preliminary reading.
  • The annualized core reading, meanwhile, was able to tick higher to 1.0% after holding steady at 0.9% for two straight months.
  • The main drags were as follows: (all are energy-related)
    1. Gas: down by 4.9%, subtracting 0.11% from HICP
    2. Heating oil: down by a massive 22.4, only has a small weight on HICP, so only subtracted 0.18%
    3. Transport fuels: down by 5.9%, subtracted 0.28% from HICP
  • The main drivers were as follows:
    1. Restaurant and cafes: up by 1.6%, adding 0.10% to HICP
    2. Tobacco: up by 2.7%, adding 0.06% to HICP
    3. Fruit: up by 5.2%, adding 0.06% to HICP
  • Annualized January HICP readings for the major euro zone economies are as follows:
    1. Germany: 0.4% vs. 0.2% previous; preliminary reading for February shows a 0.2% dip
    2. France: 0.3% vs. 0.3% previous
    3. Italy: 0.4% vs. 0.1% previous
    4. Spain: -0.4% vs. -0.1% previous; preliminary reading for February shows a harder 0.9% slump
  • Next inflation report: February 29 (February preliminary readings)

Business Conditions & Sentiment

  • Industrial production in the euro zone fell by 1.3% year-on-year during the December period after expanding by 1.4% during the previous month.
  • This is the sharpest drop on record since August 2013 and also marks the first contraction in industrial output since November 2014.
  • The main drags came from the 2.6% decline in capital goods production, as well as the 7.3% crunch in energy production.
  • On a monthly basis, was down by 1.0% after a previous 0.5% decline.
  • The preliminary reading for the euro zone’s February period manufacturing PMI was 51.0 (52.3 previous), which is the lowest reading ever in 12 months.
  • The preliminary services PMI reading for the same period yielded a 53.0 (53.6), which is a 13-month low.
  • The composite PMI reading was likewise at a 13-month low, printing a 52.7 figure (53.6 previous).
  • All PMI readings are still in expansion mode, however, since they’re all still above the 50.0 neutral mark.
  • Commentary from the report notes that average prices charged by companies for their goods and services fell at the “steepest rate for a year as firms competed to boost sales.”
  • The manufacturing sector got hit the hardest, “with purchase costs dropping to the greatest extent since July 2009 on the back of low global commodity prices and intense competition among suppliers.”
  • The services sector, meanwhile, saw a slower rate of increase in input costs, which reflected “stiff competition and weak demand.”
  • Germany continues to see steady output growth, “albeit with the pace of expansion hitting a seven-month low as a solid rise in service sector activity was countered by the weakest rise in manufacturing output since November 2014.”
  • France, meanwhile, saw a contraction business activity for the first time since January of last year.
  • As for the other euro zone countries, they “saw business activity rise at the weakest rate since February of last year.”
  • Job creation in the services sector eased to the weakest rate since September 2015.
  • Employment in the manufacturing sector saw the slowest increase in a year.
  • Next industrial output report: March 14 (January period)
  • Next PMI report: March 1 (February final readings)

Consumer Sentiment & Spending

  • Retail sales picked up in December after stagnating in November (0.3% vs. 0.0% previous).
  • Retail sales is now in positive territory for the first time in four months.
  • On an annualized basis, retail sales grew by 1.4% (1.6% previous).
  • In terms of trends, annualized retail sales has been growing at a slower pace for four straight months now.
  • The monthly increase was driven mostly by a 0.6% increase in the sales of food, drinks and tobacco, but the 0.2% in sales for non-food items helped too.
  • Sales of automotive fuel declined by 0.1%, though, but it’s not clear if the decline was due to lower oil prices or lower sales volume.
  • Monthly retail sales readings for the major euro zone economies are as follows:
    1. Germany: -0.2% vs. 0.2% previous
    2. France: 1.3% vs. -1.2% previous
    3. Italy: -0.1% vs. 0.3% previous
    4. Spain: 0.2% vs. -0.5% previous
  • The European commission’s consumer confidence indicator drove deeper into the red (-9.0 vs. -6.3 previous) during the February period.
  • Expectations for future employment, savings, household finances, and the overall economic situation took severe hits.
  • Next retail sales report: March 3 (January period)
  • Next consumer confidence survey: March 21 (March period)

Forex Snapshot: Euro Zone Growth

Forex Snapshot: Euro Zone EmploymentForex Snapshot: Euro Zone InflationForex Snapshot: Euro Zone Business Conditions & SentimentForex Snapshot: Euro Zone Consumer Spending & Sentiment

Putting it all together

The available economic reports that I chose to focus on aren’t exactly painting an upbeat picture for the euro zone’s economic situation. More importantly PMI reports are hinting that Q1 2016 is off to a bad start. And the most distressing part (for forex traders who are bullish on the euro) is that PMI reports and the available preliminary inflation reports are implying heavily that the uptick in January is gonna get torpedoed come February. And if y’all can still recall, the ECB has its sights mainly on inflation.

And with the next ECB rate decision looming ever closer (March 10, so mark your forex calendars), and also given ECB Draghi’s February 15 statement that the ECB “will not hesitate to act,” forex traders will probably be wary of loading up too heavily on the euro, unless we see more signs that inflation is picking up or severe risk aversion in European markets force some forex traders to get out of riskier assets and into the lower-yielding euro. Assuming, of course, that forex traders have fully priced-in the potential negative effects of a Brexit on the euro zone.