It’s been really busy for Europe on the economic calendar for the last couple of days. And the data barrage has at least one more day to go!
Tomorrow we get the important retail sales data after the final PMI composite data.
The expectation is for a round-up of the last of the generally worse than anticipated economic indicators from Europe.
The most concerning was the performance of the EU’s largest economy. Many of the surrounding countries are being affected by what some analysts are calling the “German economic autumn”.
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The outlook for major businesses across Europe is falling to the worst levels since the last economic crisis.
Where We Are Headed
As the economy slows due to structural issues, usually the last to feel the effects are consumers. This is different from a financial crunch scenario, where a drop in consumer demand leads to a spike in inventories and a pullback in production.
Businesses across the continent are seeing orders drop primarily for exports. The trend has been maintained since the beginning of the trade war and heightened risk of tariffs. However, it took an unusually strong downturn last month.
Dropping export orders is a world-wide phenomenon. The indicator illustrated this well the day before yesterday with surprise and significant drops both from the US and Russia.
But Europe has an additional concern that provides uncertainty and especially impacts consumer sentiment: Brexit.
A graph of the vagaries of retail sales shows clear drops around key dates in the process. And with interest rates so low, there is little monetary policy space to support demand. Especially ahead of the uncertainty of the Brexit deadline and further US-China negotiations.
What We Are Looking For
Tomorrow we get retail sales data for September.
Expectations are for these to improve despite the contraction in business sentiment. The market usually focuses on the monthly data, and this could be when we get the largest bit of fundamentals-driven market volatility.
Projections indicate that monthly retail sales will have increased by 0.1%. This is compared to -0.6% in the prior month.
This figure bounces around a bit given the plethora of disappointing data we’ve had. However, a better than expected result could support some upside for the euro from relief at finally getting some good news.
A disappointment in the data could lead to further depression. It could also mean a return to the downward trend that it has been maintaining since early September.
On an annualized basis, expectations are for retail sales to slow to a 1.4% increase compared to +2.2% in August.
It’s really hard for CPI to grow if consumers are not increasing demand, and a slow pace in retail sales would translate into slow inflation in the near future. The ECB would be under renewed pressure to take action, which would be generally seen as negative for the euro.
The Other Data
Something to keep an eye out for tomorrow is the eurozone services PMI.
It isn’t all that likely to move the currency. But, so far, the economic problem facing Europe has been outward-facing as a lack of exports. The internal outlook has remained in expansion through this period, with the worst outlook in January and February.
But if September Services PMI were to come in below 51 (or worse, slip into contraction) the market might read it as the broader economic concerns bleeding over into the internal market. It could also suggest that a recession (technical or otherwise) is on the horizon.
It’s not currently on many analysts’ radar, but it could provide some significant downside risk for the euro should the market be caught by some surprisingly bad PMI data tomorrow.