European Services, Manufacturing Contract at Record Pace, Heightening Fears of a Deep and Severe Recession

The details of the Euro-Zone November manufacturing PMI show that the drop in the overall reading to 36.2 from 41.1 in October, reflects sharp declines in both output and orders readings. The output reading fell to 33.1 from 39.8 and the fact that the orders reading dropped to just 29.7 from 36.2 suggests that a quick turnaround is unlikely as demand continues to deteriorate. The employment reading fell to 41.3 from 44.4, which indicates that the slowdown in growth is increasingly leading to job cuts, which will push up Euro-Zone unemployment and weigh on consumer confidence and consumption trends. At the same time readings for both input and output price inflation fell below the 50 point no change mark. So not only is inflation decelerating, prices are actually falling. The reading for output prices is the lowest since July 2003 and data confirms that the central bank has room to cut rates further as inflation risks recede quickly. With oil prices coming down sharply we could even see some months of negative inflation numbers.

The details of the Euro-Zone services PMI showed that the drop in the overall reading to 43.3 from 45.8 reflects a decline in the reading for new business to 41.1 from 43.2 in the previous month and with this the lowest in the survey history, which reaches back to July 1998. The reading for the backlogs of work dropped to 43.3 from 44.2, the lowest since June 2003. At the same time input price inflation is coming off and output price inflation has actually fallen below the 50 point no change mark, which suggests price cuts on the back of falling demand. The output price reading of 47.7 is the lowest since July 2003 and together with a renewed fall in business expectations to just 42.0 will put more pressure on the ECB to cut rates further.

Meanwhile, the advanced services PMI reading for Germany contracted for the second consecutive month as the index slipped to 46.2 from 48.3 in October. Meanwhile the manufacturing activity contracted for the fourth straight month as the PMI reading slipped to 36.7 from 42.9. The data suggests that Europe’s largest economy is slowing at an even faster pace in the fourth quarter, and conditions may only get worse over the coming months as demands from home and abroad deteriorate. The dour outlook for Germany has certainly raised expectations that the European Central Bank will ease policy further at the December 4 policy meeting.

Euro-US Dollar (EUR/USD) steadied despite weak Euro-Zone data. The pair recovered in the Asian afternoon and maintained its hold above 1.2500 during early European trade, with large outstanding 1.2550 option strikes influencing price action. Euro-Zone PMI data continued to indicate further deterioration in services and manufacturing business, with the flash service PMI at 43.3 and manufacturing at 36.2. The weakness in the Euro-Zone release followed earlier weakness in German and French PMI, which will reinforce expectations of further contraction in Q4 growth. One of the factors underpinning the euro has been persistent speculative interest to buy EUR-JPY, which benefited on equity market strength following news that Citigroup could be looking for a merger partner and speculation that China could cut interest rates. EUR-USD is expected to run in to supply above 1.2550 amid an overhang of option related offers, which are layered in to 1.2600. Bids are noted from Asian central banks and a quasi-official name under 1.2500 and in to 1.2460-80.

DailyFX

Disclaimer

Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. The publications herein do not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of the recommendations in this website. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. All intellectual property rights are the property of Daily FX. Daily FX and its affiliates, will not be held responsible for the reliability or accuracy of the information available on this site. The content herein is provided in good faith and believed to be accurate, however, there are no explicit or implicit warranties of accuracy or timeliness made by Daily FX or its affiliates. The reader agrees not to hold Daily FX or any of its affiliates liable for decisions that are based on information from this website. Daily FX highly recommends that before making a decision, the reader collects several opinions related to the decision and verifies facts from at least several independent sources.