Daily Economic Commentary: Euro zone

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Daily Economic Round Up of data from the Euro zone!

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The euro traded in a firmer tone yesterday as it tested the 1.4100 price level again. The reading on consumer confidence helped euro bulls take it all the way up there. It came out at -25, less bad than the -29 prediction.

Looking ahead, the European Central Bank’s interest rate decision is scheduled on Thursday. This is certainly an event traders will be watching out for as there has been a lot of speculation on the ECB’s next move. The bank has remained relatively conservative when it comes to easing the recession’s grip on the 16-nation zone. They have already cut interest rates down to an all time historic low of 1% but it seems that economists and analysts are clamouring for more. The current state of euro zone can’t be fixed by interest rate cuts alone, they said.

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Consumer confidence in Europe showed signs of improvement as it rose from -28 to -25, against the forecasted decline to -29. This suggests that the central bank’s stimulus measures, such as record low interest rates, are helping to ease the recession. Since this index is an indicator of financial confidence, it implies that consumer spending may show signs of recovery in the near future.

The EUR could see some short-term weakness for today as economic reports are expected to yield not-so-strong figures. German unemployment is expected to rise by 44K in May after posting a mere 1K increase in April. M3 money supply, which is the amount of money in circulation and in banks’ deposits, is projected to post a 4.6% increase. Money supply was up by 4.9% in the previous month. Private loans are also expected to be lower in May than in April. These reports are all due at 4:00am GMT. Lastly, the CPI estimate forecasts a 0.2% decrease in price levels. This projected slowdown in inflation implies that the central bank wouldn’t be hiking up rates anytime soon.

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The EUR closed mixed in yesterday’s trading as it posted small losses against the CAD and the CHF and gained versus the trio of GBP, JPY, and the USD. The EUR surged vis-à-vis the USD and the JPY during the US session because of the worse-than-expected ADP non-farm employment change and pending home sales in the US.

The Euro session saw a rather quiet trading with only the release of the German retail sales for the month of May. It managed to gain some support, however, against the JPY and the USD with a 0.4% surprise gain in the German retail sales account. The consensus was for a flat reading after posting a 0.5% gain in the month prior. The period’s increase marks its third consecutive monthly rise. In spite of this, the annualized figure still shows a decline of 2.9% in sales. The government’s work subsidies plus the cool down in inflation may have supported the Germans to spend amidst the struggling economy.

Today, the currency may trade in a mixed and light fashion up until today’s interest rate decision by the European Central Bank (ECB).

The ECB will decide on its target interest rate at 11:45 am GMT. The bank is expected to keep its interest rate 1.0%. Much of the attention, however, will be given to the bank’s quantitative easing measures. The bank announced its plans to purchase about €60 billion in covered bonds during its last monetary policy meeting. The details of which will be further elaborated today.

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The EUR dropped like a bomb yesterday when the European Central Bank decided to sit in on its hands this time. Apparently, the ECB President Jean-Claude Trichet thinks that interest rates in the 16-country zone should remain status quo. He said that the bank has already done its fair share in easing tight credit conditions. The central bank has already lowered interest rates an all-time historical low of 1% and committed to purchase bonds worth 60 billion EUR. It is now the local banks’ turn to pass on liquidity to the economy.

Euro zone’s underlying fundamental health remains weak. Yesterday, Eurostat reported that the unemployment rate rose to a whopping 9.5%, much worse than the 9.3% initially predicted. The producer price index also sang the same depressing tune. It showed that prices fell by 0.2%, opposite the 0.1% gain economists were expecting.

Today, we’ll see the report on retail sales for May at 9 am GMT. Just like yesterday, the prospect is bleak as retails sales is expected to have dropped by 0.1%. Over the weekend, Trichet will be speaking at the Le Cercle des Economists Conference about new global balances. He’s scheduled to speak at 9:45 am, Sunday.

That's all for this week my friends! Enjoy the long weekend!

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The EUR continued to fall against the USD last Friday, as the EURUSD closed slightly lower. Still, it was generally a pretty slow day in the markets after all action on Thursday and with the US starting its holiday weekend.

Euro-zone retail sales continue to be weak, as a report revealed that retail sales fell more than expected. Sales fell by 0.4% from April to May, more than the forecasted 0.1% decline. This indicates that there is a lot of hesitation on the part of Euro-zone consumers to spend as unemployment fears continue to persist. The unemployment rate currently stands at 9.5%.

Over the weekend, ECB President Jean Claude Trichet spoke at the Le Cercle des Economists Conference. Trichet said that he fears that lack of coordination on the part of governments around the world regarding economic policy could undermine efforts to prevent another financial crisis. He said that countries should not “internalize” their problems and that they should watch what other countries are doing as well. These are interesting statements from head of the ECB, considering that it was the ECB had been reluctant to be as aggressive as the UK or US in administering certain monetary policy moves.

Later today, the Sentix Investor Confidence report will be released at 8:30 am GMT. The report is expected to show that investor confidence has risen slightly, as the index is forecasted to have a score of -23.7, higher than last month’s figure of -27.

As for tomorrow, German factory orders data will be available (10:00 am GMT). Expectations are that factory orders in the largest economy of the Euro-zone increased by 0.6% from April to May.

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The EUR/USD set its sights on jumping back above the 1.4000 mark but the prevailing risk sentiment yesterday prevented it from doing so. Although the pair was able to make a rebound at the end of the day, weak economic data and recent criticism of the ECB's actions restrained the EUR from making further headway.

The pair slid to a low of 1.3878 as Sentix investor confidence index recorded a drop from -27.0 to -31.3. Economists were optimistic in expecting the index to post an improvement to -23.7 but were immensely disappointed with the actual figure, which indicated that sentiment in the Euro-zone deteriorated significantly last month.

Meanwhile, the Financial Times criticized the central bank's quantitative easing efforts in saying that the liquidity injections are not trickling down to the real economy. The paper also commented on the damaging effect of the rising EUR on the region's exports.

Up ahead, we have German factory orders at 11:00am GMT today. Analysts expect a 0.6% increase in factory orders for May. Considering the negative impact of EUR appreciation on manufacturing demand, the actual figure might come short of expectations and trigger another drop in the EUR.

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The EUR advanced against its dance partners after a German factory orders report showed a gain of 4.4% in May. However, the report did not have enough muscle to keep the EUR looking good (+) throughout the day. It only closed on the green side versus the CAD and GBP while it tripped versus the rest.

As mentioned, the German factory orders in May surprisingly rose by 4.4% against expectations for only a 0.6% increase. It also rose by 0.1% in April. May’s gain is the biggest since June 2007. The account measures change in the total value of new purchase orders placed with manufacturers. The increase in the account was boosted by an 8.2% advance in exports to non-EU countries. Domestic demand also placed a hand with its 3.9% rise. An increase in the value of purchase orders signifies a probable increase in future production. This would then be a positive signal for the Eurozone's economy at least in the short term.

Today (9:00 am GMT), the Euro zone’s final GDP will be reported. UK’s economy is expected to have contracted by 2.5% during the period after falling by the same degree during the last quarter of 2008.

The German industrial production in May will also be released at 10:00 am GMT. The consensus is for a 0.6% increase in the period after a 1.9% drop in the month prior.

Any surprise change in the Eurozone’s GDP would definitely impact the EUR. Barring any changes, the EUR may gain a little support given the positive expectations in the German industrial production.

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Humpty dumpty sat on a wall, humpty dumpty had a great fall... And the EUR followed soon after. For the second day in a row, decreased risk tolerance continued to force investors to push the EUR lower against its lower yielding counterparts, the USD and the JPY.

Economic data that came out of Euro zone was mixed. On the one hand, the 16-nation’s figure on its final gross domestic product confirmed a 2.5% contraction in the first quarter of 2009. This was the fourth consecutive quarterly decline! The thing with euro zone is that its economy is highly reliant on exports. When the global recession hit, global demand for exported goods plummeted, pushing euro zone’s output downwards. On the other hand, German industrial production seems to be picking up. The report on German industrial production showed an unexpected rise of 3.7% for the month of May. One figure doesn’t make a trend though so be cautious!

Today, Germany’s final figure on its consumer price index and trade balance are set for release t 6 am GMT. Economists are expecting the final CPI to confirm the preliminary 0.4% increase estimate. The German trade balance is predicted to show an 8.9 billion EUR surplus. Expect to see the European Central Bank’s monthly bulletin at 10 am GMT too.

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It was a bounce-back Thursday for the Euro, as it pared off losses it made this past week against the USD. The pair jumped up and closed at 1.4032, after it had opened trading at 1.3880. Risk appetite seemed to improve last night (or is just a correction?), possibly helped by news coming out from the UK (non-expansion of its bond purchase program) and the US (better than expected unemployment claims).

Not much high impact news came out from the Euro-zone itself yesterday however. The ECB monthly bulletin was released but since the data in the article just reflected what was said in their latest interest rate decision statement, this had no effect on the markets. German Final CPI and Trade Balance reports were also released, with the CPI report showing no changes while the second report indicated that exports rose in May. This was another set of data that was encouraging and suggested that the recession was easing for the Euro-zone.

French and Italian Industrial Production m/m data is coming out, with forecasts for 0.1% and 0.7% declines for the month of May. Will these reports show surprise increases like the German reports?

Also, watch out for the G8 meetings that will be concluding today. Positive statements could support yesterdays move and boost risk appetite.