Among the wealth of economic events coming out of Europe this week, one that we don’t want to miss is factory orders from Germany.
This gives some important insight into how the largest economy in the eurozone is doing, as well as the overall direction of the currency bloc. It’s also pretty much the cap for the week in terms of macro events for the euro. So, we could expect the currency to settle into its direction for the weekend after release.
Germany has had some difficulties in getting its most important economic sector growing. This is due to a variety of factors. Perhaps the most important of those factors is the auto industry.
Earlier this week we got a report that car sales in Germany once again declined, accumulating a 5% drop in the last year.
What We Are Looking For
The data will be released at the start of the European trading session tomorrow.
As of now, the consensus is that monthly factory orders will slip back into contraction at -0.1%, compared to the +0.3% last month. This implies further yearly deterioration to -5.7% from the -5.3% in the prior month. But, we might get some positive news if the figures for the previous month are revised higher.
Last month’s figures were billed as a “ray of sunshine” by analysts, showing two consecutive months of growth. However, the manufacturing figures we’ve been getting over the last few weeks have not managed to maintain that positive tone.
This suggests that the market is in for another disappointing result. Although, we had the same feeling last time around when we got a pleasant surprise.
It should be noted that the data was collected well before the results of the G20 summit could make their impact.
On Monday we saw the final Manufacturing PMI for Germany lowered from the flash estimate by 0.4 points. Although this is firmly in contraction, it is still just slightly better than last month. So the general idea that the manufacturing sector might have found a bottom remains intact, even if the market got a little over-optimistic after the flash result.
Buried in the details for the PMI report, there were some good signs. The month over month improvement was driven primarily by new orders. This would suggest an improvement in factory orders this time around, as there seems to be at least a loss of pessimism in the sector.
The breakdown of the data is just as interesting. Orders from the eurozone fell but were entirely recouped by an even larger increase in demand from third parties. There still seems to be a solid global demand for German products.
This is somewhat contrary to the consensus that trade concerns were impacting the sector, and that the domestic market would be able to tide the country through.
The Market Reaction
The market generally cares the most about the monthly change in factory orders. And this particular bit of data tends to bounce around a lot.
There is something of a range that has been established over the last couple of years, between -4.0% and +4.0%. The market’s reaction tends to be somewhat muted if there isn’t at least a full point of difference between the expectation and the print.
If we were to get a positive surprise, then it’s been over a year since factory orders broached +2.5%. And that could give us some optimism in the markets were it to happen. On the downside, there are quite a few analysts pointing to a result close to -2.5%.
Should the result be below that, then we could see the euro weaken a bit.