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German Output Declines to 3-Year Lows

German Output Declines to 3-Year Lows

Benjamin Spier, Technical Strategist

THE TAKEAWAY: German output declines to a 38-month low -> Weak export demand contributes to industry declines -> Euro continues to trade higher

German private sector output fell at a faster rate in August according to the initial Purchasing Managers’ Index by Markit. The composite output index fell to 47.0, which is a 38-month low and 0.5 lower from July’s results. The PMI for services fell to 48.3, this was the first indicator of declining activity in 3-years and lower than expectations for growth and a survey result of 50.1. Manufacturing activity was higher than expected at 45.1. A PMI below 50.0 indicates a decline in activity.

The PMI’s pointed to a steep and accelerated decline in new business by private sector companies. New export orders also dropped rapidly. In manufacturing, employment levels declined for a fifth successive month.

Markit Senior Economist Tim Moore expressed his concern over the German economy, “the latest survey indicates that the German economy is sailing into greater headwinds as the third quarter progresses, with PMI readings slipping deeper into territory normally associated with GDP contractions.”

A weakened demand from Southern Europe was partially responsible for the decline in output, and the Eurozone debt crisis has weighed on German economic growth as exports to other members of the currency bloc dried up while fiscal policy focused on debt reduction and regional stability. There have been numerous recent reports of the ECB considering a plan to cap Spanish and Italian yields, as a measure to help fix the debt crisis. German Chancellor Angela Merkel has voiced support of such an action, and tomorrow she will meet with Greek Prime Minister Antonis Samaras to discuss Greece’s bailout needs and a possible extension of the country’s budget targets.

The better than expected PMI for manufacturing and worse than expected services index had no significant effect on the Euro. EURUSD rallied yesterday above 1.2500 and a 3-month descending trend line, thereby setting a new monthly high, following the release of the FOMC minutes, which indicated that the committee members are considering another round of quantitative easing. A 2-year descending trend line could provide resistance around 1.2660.

EURUSD 15-minute: August 23, 2012

German_Output_Declines_to_3-Year_Lows_body_eurusd_daily_chart.png, German Output Declines to 3-Year Lows

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