The ECB likely didn’t need any further convincing when it comes to rolling out more monetary accommodation in the months ahead, but just in case, a 43.1 print on the flash read for BME and IHS’s Markit PMI for Germany will do the trick.
The forecast range was 44 to 49.9, which means the gauge missed even the lowest estimate. 43.1 is the weakest reading since July of 2012 and represents a fairly sharp drop from June. This was the seventh consecutive month in contraction. New orders have been in contraction for ten straight months.
“Manufacturing output fell sharply in July, registering its steepest drop since March and one of the most marked contractions since 2009 with new orders, employment and stocks of purchases also falling more quickly”, the report reads. “The health of German manufacturing went from bad to worse in July, according to the flash PMI data, raising the risk of the euro area’s largest member state entering a mild technical recession”, Phil Smith, Principal Economist at IHS Markit said.
Perhaps just as disconcerting, it sounds as though the malaise is starting to leak over into the services sector which has, until now anyway, remained some semblance of resilient. “Still solid growth in the service sector means that the German economy is just about keeping its head above water for now, but even here there are signs of increased worries among companies as optimism hit a three-and-a-half year low”, Smith went on to caution.
Minutes earlier, the flash read for France’s July manufacturing gauge printed 50, well below the lowest estimate and on the edge of contraction. New orders fell below the demarcation line to 49.4 from 51.4 in June. French services was lackluster too.
The news sent core yields plunging. Bunds rallied with big volume in futures as yields pushed back down towards the depo rate and the euro dropped to the lowest since May 31.
10-year yields in the Netherlands, Finland and Austria fell to new all-time lows. it’s a sub-zero world.
So, again, if the ECB needed any further evidence to support the case for easing, this will certainly work. Although a rate cut is unlikely on Thursday, action in September is a virtual certainty and you can expect the groundwork to be laid this week.