German Data Emphasises Weakness At European Core

The European macroeconomic picture remains weak, following a slew of data that confirmed that even the German powerhouse is still stuck in reverse. Most of this was expected however, and it was an unsubstantiated rumour on the prospects for the French credit rating that sent things lower on the day.

European unemployment did fulfil expectations and post a new-record high yesterday of 11.8% with the youth component also tilting higher. A panel discussion I took part in on Monday on welfare and unemployment in the EU highlighted that further austerity within the region will only see this number increase over the course of 2013, leading to further protest and political risk. Spain is the main focus of this as it comes hot on the heels of the latest arguments from the regions to become autonomous from Madrid.

The key will be trade, but once again data from Germany confirmed that the demand for its goods, both in the form of current exports (3.4% lower) and future factory orders (down 1.8%), was in decline. As we highlighted yesterday this is not as a result of a lack of demand from the BRICs, but internal requirement from the Eurozone.

We start to get into the teeth of this week’s macro data today with the UK trade balance number and German industrial production. The trade balance should have recovered somewhat in November with lower energy imports given the mild weather although, as the Bank of England has been keen to point out, the strength of GBP will not have helped our export base.

German industrial orders are set to rise today albeit after an unexpected slip in October. This could simply be inventory restocking but we would estimate that backlogs within the system are low following slack demand. The overall trend will remain as subdued in other words.

Overnight markets have been uninspiring following the hubbub over the French credit rating. Yesterday afternoon rumours abounded that the French government had been given a downgrade notice by an unnamed ratings agency. Governments are given 24hrs notice on re-gradings so as to have time to react. The rumour smelt fishy from the start and was swiftly denied by the French government.

We are expecting ratings downgrades, including the UK’s, over the course of Q1 but only after provisional figures for Q4 GDP are released. The rumour was good for a 50 pip dive in EURUSD but little else.

Our next webinar is due this Thursday and with the ‘fiscal cliff’ out of the way for at least a couple of months we turn our attention to what else could influence rates through the 1st quarter. We’ll take a look at the Italian elections, a possible downgrade of the UK’s credit rating and the increased chances of a Spanish bailout alongside a rundown of our expectations and predictions for the next year.