LONDON (Reuters) - Rarely do you get more significant numbers than today's flash GDP read-out from Germany. It showed the euro zone's largest economy shrank in the second quarter, caught in the cross-fire of a global trade war that has hit exports.
Although merely a 0.1% quarter-on-quarter drop, it prompted ING economists this morning to call the end of a “golden decade” that has seen the economy grow by an average of 0.5% every quarter since the 2008/09 recession.
It prompts two interlinked questions: does this mark the start of a wider euro zone slowdown that the few remaining weapons in the ECB arsenal will be unable to counter? And, as we exit the Angela Merkel era, will Germany finally be forced to abandon its balanced budget policy and start spending?
Later this morning, Britain’s Office for National Statistics releases July inflation, forecast to show headline inflation below the Bank of England’s 2% target. That will reflect the effect of energy price caps and volatile categories such as video games having boosted comparative prices a year earlier.
Factory-gate inflation is also likely to remain soft, despite the weak pound. The bottom line is that it is unlikely to support the argument for an interest rate hike any time soon.
The Italian Senate may for now have delayed the push by Matteo Salvini for new elections, but the leader of the far-right League is out there undaunted making new headlines. The newspaper Corriere della Sera quotes him this morning as saying the high-profile citizen's income scheme introduced by the government this year would need reviewing if the League won elections.
The idea mutated from a plan initially billed by the League’s 5-Star partners as an ambitious “basic income” scheme to something more akin to a standard continental Europe income benefit, but even so there were doubts about Italy’s capacity to administer it. It has only been running for four and a bit months.
MARKETS AT 0655 GMT
Has Donald Trump blinked again in the face of stock market pressure? The pattern of escalating the U.S.-China trade war until the markets take fright and then backing off is becoming familiar.
After dropping more than 1% on Monday, the S&P500 rebounded almost 1.5% overnight after Trump said he would delay until December 10% tariffs on about half of the $300 billion Chinese imports earmarked for the increase on Sept. 1.
Products like smartphones and laptops got the three-month reprieve ostensibly to avoid the tariffs hitting U.S. holiday sales at the end of the year, and Apple’s share price jumped more than 3%. Further talks for next month were also scheduled.
Although U.S. futures stalled, Asia stocks rallied. Shanghai, Hong Kong, Tokyo and Seoul stock benchmarks all gained 0.5% to 1.0%. The offshore Chinese yuan rate strengthened briefly to below 7 per dollar late Thursday, but then weakened again to 7.03 first thing today.
While the trade war game of chicken plays out, the global economy is suffering. China reported a slowdown in annual industrial production growth to its lowest in 17 years in July – a lower-than-expected 4.8%. Retail sales and investment growth also came in below forecast for the month.
Adding to the gloom, Germany reported a 0.1% contraction of its economy for the second quarter – sending Germany’s 10-year bund yield to a record low of -0.623% first thing and euro stock market futures into negative territory. Global recession fears have been mounting again in recent weeks, and for all the ebb and flow over trade, the sheer uncertainty is taking its toll.
Add rising probabilities of a no-deal Brexit and possible snap UK election, the increasingly violent protests in Hong Kong and possible intervention from Beijing, Argentina’s latest market crash on election fears and the latest Italian government crisis, and anxiety has risen considerably well before we get to likely monetary policy easing next month from the U.S. Federal Reserve and European Central Bank.
As negative bond yields spread across Europe, U.S. bonds are also flagging the risk of a 2020 recession there. The Treasury yield curve between three months and 10 years has been inverted for almost three months now, and at -0.33% on Wednesday it was close to its most negative in 12 years – just before the banking crash over a decade ago and the last major downturn.
Some people’s more- favoured measure of the yield curve – between two years and 10 years – is also flashing amber; it flattened to its lowest level since 2007 yesterday before Trump’s partial retreat and is now close to inverting for the first time in 12 years.
Ten-year Treasury yields gained little from Trump’s move, however, and failed to hold above 1.7% - hovering about 1.67% first thing. In currency markets, the dollar’s DXY held firm.
The safe-haven yen strengthened again after yesterday’s jump in dollar/yen to 106.80 from lows close to 105. Brent crude oil prices slipped back after surging above $60 per barrel on Tuesday following the trade news.
Euro/dollar remains peculiarly stable, nudging up to $1.1176 first thing. Euro zone second-quarter GDP is due later. Italian bond yields were also lower after the Italian Senate pushed back the debate on the future of the government to next week. The BTP/Bund spread tightened for a third straight day to below 220 basis points.
In corporate news, shares in Schindler were seen opening down 2.5% after the elevator and escalator manufacturer said second-quarter net profit dropped 22.4% from the previous year, hurt by wage inflation, higher material costs, foreign exchange, and planned increases in spending. Its results illustrate a broader trend of margin pressure in Europe.
In better-looking updates, power producer RWE said core profit rose by a fifth in the first half, boosted by a stronger-than-expected performance at its trading unit. Its shares were seen opening up 1.5%.
Nordex kept its margin target even though profits more than halved in the first six months, saying it expects business to pick up in the remainder of the year. Nordex shares are up 5% in early trade.
Among smaller companies, Evotec and Cancom were up in early trade after results. Both lifted their guidance. The latest data from Refinitiv I/B/E/S has shown that Europe Inc is suffering a recession, with market consensus forecasting a drop in earnings in the second and third quarter.
In the UK, a senior Standard Chartered executive said the bank plans to increase its private-banking assets by 50% to about $100 billion in three to five years and to hire dozens of bankers in Hong Kong and Singapore towards that goal.
Other stock movers: Axel Springer revenue and profits fell in the second quarter; Stada's CEO said the company would be "very selective" on acquisitions; and Balfour Beatty reported higher first-half profit and raised its cash forecast.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —