European Equities: Employment and Inflation Figures in FocusCould German employment numbers spoil the New Year rally?
Friday, 3rd January 2020
German Unemployment Change and Rate (Dec)
German CPI (MoM) (Dec) Prelim
French CPI (MoM) (Dec) Prelim
It was a bullish day for the European majors. The CAC40 and DAX30 rose by 1.06% and by 1.03% respectively, with the EuroStoxx600 gaining 0.93%.
Reversing losses from earlier in the week, support came from optimism over the U.S – China phase 1 trade agreement.
Over the holidays, U.S President Trump had announced that the phase 1 agreement would be signed on 15th January.
The PBoC gave the markets an extra boost, announcing that it would cut the Reserve Requirement Ratio by 50 basis points.
It was a busy day on the Eurozone economic calendar on Thursday. December manufacturing PMI numbers from Italy and Spain and finalized manufacturing PMI numbers from France, Germany, and the Eurozone were in focus.
According to the December Markit Surveys,
Spain’s Manufacturing PMI eased from 47.5 to 47.4 in December, while coming in ahead of a forecast of 47.0.
- Production fell at the fastest rate since April 2013, with headcount reduction hitting the sharpest pace in over 6-years.
- New orders fell for an 8th consecutive month in December.
- The automotive sector remained a key source of weakness.
Italy’s Manufacturing PMI decreased from 47.6 to 46.2 in December, falling beyond a forecast of 47.2.
- Manufacturing conditions deteriorated at the fastest pace for over six-and-a-half years.
- The rate of job shedding accelerated to the quickest in over six-and-a-half years.
- New orders also fell sharply.
France’s finalized Manufacturing PMI came in at 50.4, upwardly revised from a prelim 50.3, while down from a November 51.7.
- Business conditions improved at the slowest pace in 3-months, with output growth slowing and new orders contracting.
- Hiring stagnated at the end of the year, with the sector reporting a downturn in purchasing activity.
- Optimism towards 2020 fell back to October’s three-and-a-half-year low.
Germany’s finalized Manufacturing PMI came in at 43.5, which was better than a prelim 43.4. In November the PMI had stood at 44.1.
- Downward pressure on the headline PMI continued to come from output, with the rate of decline accelerating for the first time in 3-months.
- While inflows of new business fell for the 15th month in a row, the rate of decline eased for a 3rd consecutive month. The rate of decline was the weakest since December 2018.
- Optimism hit its highest level for 15-months, supported by the stabilization in new orders and hopes of improving economic conditions.
- In spite of the improved optimism, the rate of staff cuts accelerated to one of the quickest reported over the last decade.
For the Eurozone
According to the Eurozone Markit PMI Survey,
- After hitting a 3-month high in November, the downward trend resumed, with the sector contracting for an 11th consecutive month.
- For the 4th quarter, a PMI of 46.4 was unchanged from the 3rd quarter’s seven-year low.
- Of the 8 member states reporting, 7 saw weaker PMI numbers compared with November.
- Germany was the weakest performing country. Deteriorations in Italy and the Netherlands were the sharpest in over six-and-a-half years.
- By contrast, Greece saw sustained growth in December to top the table.
- For the bloc, the rate of decline in output matched September’s 81-month record.
- New orders also fell at a sharper pace, despite new export orders seeing the weakest rate of decline since last January.
- Employment declined for an 8th consecutive month and at the sharpest pace since the survey began in 2013.
- Optimism improved, however, with expectations about output hitting a 6-month high in December.
From the U.S
The finalized Markit Survey Manufacturing PMI rose from a prelim 52.5 to 52.6 in December. In November, the PMI had stood at 52.6.
- The 4th quarter average PMI was the strongest since the first quarter of 2019.
- While softening from November’s recent high, output growth remained moderate.
- Greater client demand and rising new orders supported output growth at the end of the year.
- New order growth was the 2nd strongest since April, with export orders rising for a 3rd consecutive month.
- In spite of rising client demand, optimism remained muted, whilst improving from the previous month.
Earlier in the day, China’s Caixin Manufacturing PMI fell from 51.8 to 51.5 in December. Economists had forecast for the PMI to hold steady at 51.8.
- The rate of new order growth fell to a 3-month low, while export sales saw a marginal increase.
- Confidence towards the next 12-months remained weak, with staffing numbers stagnating.
- There was a pickup in purchasing activity and build-up of inventories, however.
- Operating expenses rose for a 4th consecutive month, leading to increased selling prices, a first in 6-months.
The Market Movers
For the DAX: It was a bullish day for the auto sector. Volkswagen led the way, rallying by 2.63%, with BMW (+1.72%), Continental (1.87%), Daimler (+1.54%) also saw solid gains on the day.
It was a particularly bullish day for the banks. Commerzbank rallied by 5.84%, with Deutsche Bank surging by 7.32%.
From the CAC, it was also a bullish day for the banks. BNP Paribas and Credit Agricole rose by 1.53% and by 2.05% respectively, with Soc Gen rallying by 2.14% to lead the way.
It was a mixed day for the French auto sector, however, with Peugeot rallying by 2.91%, while Renault fell by 0.06%.
Airbus also found strong support after toppling Boeing from the number 1 spot. Airbus became the largest manufacturer of aircraft for the first time since 2011.
On the VIX Index
The VIX slid by 9.51% on Thursday. Following on from a 7.02% fall on Tuesday, the VIX ended the day at 12.5.
Optimism over the U.S – China trade deal supported risk appetite at the start of the year, pinning the VIX back on the day.
The Day Ahead
It’s a relatively busy day on the Eurozone economic calendar. Key stats include French, German and Italian prelim inflation figures and German unemployment numbers for December.
Barring a material jump in inflationary pressures, we would expect Germany’s unemployment change figures to have the greatest impact on the majors.
If the latest manufacturing PMI numbers are anything to go by, labor market conditions continue to be under pressure.
Later in the day, the market’s preferred ISM Manufacturing PMI numbers will provide direction late in the session.
While the stats will influence, expect market risk sentiment towards trade and Brexit to also be a factor on the day.
In the futures markets, at the time of writing, the DAX was up by 50 points, with the Dow up by 35 points.