German Manufacturing on the Mend

Daily Analysis - 06/12/2016

Factory Orders Surge After Improved Domestic and ex-Euro Demand

Driven by an improved local demand combined with foreign purchases, German factory orders rose by the fastest pace in over 2-years as the export-economy recovers from recent softness. While Euro Area demand flat-lined, better trade conditions and the weaker Euro have contributed to better dynamics for one of the German economy’s most important sectors.

German Factory Orders Soar

Following several months of weaker activity amid a troublesome environment for the export economy, German factory orders have experienced a significant uptick, driven in large part by domestic demand. The figure climbed by 4.90% on month over month in October, marking the biggest jump since July of 2014. Besides handedly beating expectations of 0.60% growth, the prior figure was also revised modestly higher, suggesting a better recovery in fundamentals. The primary driver of the growth was domestic demand climbing by 6.30% while demand from outside the Eurozone rose by 3.90%. However, one area of concern is orders within the Euro Area, with purchasing flat as the outlook for the aggregate remains shaky despite extremely accommodative monetary measures. After a spectacular rally on Monday, the German DAX 30 equity benchmark is pulling back slightly following the factory report.

Australia Keeps Rates Steady

In a widely anticipated move, the Reserve Bank of Australia opted to keep interest rates on hold at a record low 1.50%, leaving the benchmark unchanged since August. In the subsequent rate statement, Governor Philip Lowe highlighted the ongoing shift in the economy as the focus moves to domestic business in lieu of the export economy after years of significant mining investment. However, according to the central banker, many risks to the outlook remain, with fourth quarter growth expected to taper. For one, despite a high degree of business confidence, business investment remains weak while inflation is extraordinarily low. Additionally, unemployment remains a concern as more part-time jobs are created instead of full-time employment opportunities. In response to the latest measures, the AUDUSD is under pressure, falling back below 0.7500.

US Services Sector Momentum Accelerates

Data reported by the Institute of Supply Management on Monday highlighted the continued pickup in the US services sector, with the non-manufacturing purchasing managers’ index climbing to 57.2 during the month of November. This is a significant increase over October’s 54.8 reading and marks the highest reading since October of 2015 alongside 88-consecutive months of growth in the index. The main driver behind the improved results were stronger hiring and business activity. However, despite the headline optimism, growth in new orders decelerated alongside prices, indicating some potential downward pressure on the index in the months to come. The other services figure reported by Markit indicated that services growth has also tapered, falling to 54.6 from 54.7 in October. Bolstered by positive sentiment, Dow futures closed at a new high on Monday, with prices correcting modestly since the reopening.

Gold Hits New Multi-Month Low

On the back of better PMI figures from the United States, US dollar momentum, and more hawkish commentary from key Federal Reserve officials, gold prices reached a 10-month low after nearly $3.5 billion worth of contracts were dumped after the release of services data. The extreme order flow sent prices tumbling as low as $1157.18 per troy ounce before rebounding back above $1170.00. The losses come amid speculation that the Federal Reserve may tighten policy quicker than previously expected following remarks from New York Federal Reserve President William Dudley. He mentioned that should fiscal stimulus materialize, the Fed may have to raise rates faster, especially if inflation and employment overshoot their targets. However, with the dollar momentum reversing, gold managed to recover modestly despite the ongoing downward pressure on prices.