fundamental alert

Euro-Zone Manufacturing and Services Contract, Stoking Growth Concerns (Update)

Friday, 24 October 2008 07:49:09 GMT  |  DailyFX Research

German October manufacturing PMI dropped to 43.3 from 47.4 in the previous month. The breakdown showed the output reading down at just 42.5, after an already weak 46.1 in September. The reading for new orders dropped to 39.3, the lowest since the series began in April 1996. The ongoing orders weakness indicates that a quick turnaround in production is very unlikely. Meanwhile the services PMI fell to 49.7 from 50.2. This was slightly better than fears of a sharp drop below the 50 point mark, but data still suggest a broad based recession, with the composite PMI down at just 46.7 in October, versus 48.5 in September and with this the lowest reading since June 2003.

Euro-Zone October manufacturing PMI dropped to 41.3 from 45.0. Expectations had been for a reading of 44.0, so data were much weaker than anticipated. The breakdown shows a decline in the output reading to just 40.5 from 44.1 in September and the reading for new orders slumped to 36.2 from 41.7, which suggests that a quick turnaround in production is unlikely, as demand has cooled off rapidly. At the same time data point to a marked deceleration in input price inflation, with the reading coming down to just 51.7 from 63.3 as the oil price continues to decline. The services PMI dropped to 46.9, the lowest reading since October 2001 and versus 48.4 in September. The reading for new business fell to 44.6 from 47.7 in the previous month, which suggests ongoing drops in demand and a prolonged weakness in the services sector. The employment reading declined to 48.1 from 49.2, which points to acceleration in the pace of job cuts. The reading for business expectations slumped to a record low of 41.7 from 49.7 in September and together with declines in the readings for both input and output price inflation data adds to growth concerns and pressures on the ECB to cut rates further, as inflation risks recede.

Meanwhile, Euro-Dollar (EURUSD) slumped after early bids gave way to send EUR-USD down to session lows of 1.2627. EUR-USD had found a modicum of support in early European trade after Asian reserve managers were noted on dips, but fears of a collapse in Eastern European economies eventually overwhelmed any demand. EUR-JPY selling was heavy and the cross breached the 120.00 handle to hit 119.96, with selling pressure exacerbated after German October PMI dropped to 43.3 from 47.4, which will add to fears of a deep slow down in the Euro-Zone. There is some focus on the potential for an IMF bail out package for emerging market countries, but in its statement it said it was working to an early November deadline, which will do little to restore confidence quickly. It said it was in discussion on possible loan packages in response to Thursday's rumors of a USD 1 tln bail out. There is speculation that the IMF will sell gold to fund the package, which is also another potential euro negative given its strong correlation with EUR-USD price action.

 

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars