Global Daily – EM headwinds for Germany and US

by: Maritza Cabezas , Georgette Boele

Global-Daily-Insight-7-October-2015.pdf (59 KB)
  • Germany’s factory order from outside the eurozone plummet, while US trade deficit jumps…
  • …reflecting EM headwinds for the manufacturing sectors in Germany and the US
  • Meanwhile, market reaction function to possible Fed delay now positive for risk sentiment


German factory orders reflect EM-DM growth divergence

Germany’s factory orders fell by 1.8% mom in August, following a 2.2% decline in July (revised lower from -1.4%). The decline in both months was largely due to foreign orders from outside the eurozone. These plummeted by 10.1% and 3.7% in July and August, respectively, probably reflecting the slowdown in growth in China and emerging markets more generally. Meanwhile, domestic orders were up in July (3.7%), but gave back some of these gains in August (-2.6%), while foreign orders from other eurozone countries increased by 0.6% and by 2.5%, respectively. Demand for German capital goods from other eurozone countries has been particularly strong during the past three months (a total rise of almost 14%), resulting in a 10.5% 3m-o-3m rise in August. This bodes well for eurozone fixed investment growth, which currently is being supported by low interest rates, easing bank lending standards and rising profitability. Indeed, we expect fixed investment to bounce back in Q3, following its 0.5% qoq contraction in Q2.

Sharp widening of US trade deficit on external drags…

Trade remains a drag on the US economy. The US trade deficit widened in August by 15.6% to USD 48.3 bn. The main driver was a 2% fall in exports to USD 185bn, while imports increased by 1.2% to USD 233bn. The strong dollar and the weakness in the global economy, most likely reflecting  the slowdown in growth in China and emerging markets more generally, are hurting US exports, especially the manufacturing sector. Indeed, exports of industrial supplies suffered the sharpest decline.

…but also strong domestic demand

Meanwhile strong consumer demand in the US, boosted a broad range of imports from mobile phones to vehicles. After eliminating the effects of prices, which is what feeds into real GDP, the trade deficit widened to USD 63.4bn from USD 56.1bn the previous month. We think that net trade will be a drag on the economy in the coming time. Part of this drag from trade will be offset by strong growth in private consumption.


Shifting market behaviour to Fed delays

Meanwhile, we appear to be seeing a shift to how markets are reacting to changes in expectations of Fed monetary policy once again. Following the September FOMC meeting, when the Fed kept interest rates on hold, risk sentiment deteriorated. This reflects that the decision was translated as an indication that the central bank was worried about the US economic outlook. Sentiment only recovered once Fed officials clarified that a rate hike this year was still likely (hence re-assuring that the outlook had not changed that much).

Fed delay now back to being good news for risky assets

The weaker-than-expected US employment report has resulted in a change of market behaviour. This report led to increasing expectations that the Fed would wait until 2016 before hiking interest rates. However, unlike after the FOMC, this was seen as good news by investors. On Friday, equity markets closed in positive territory and have remained there since. The US dollar has recovered versus the euro and the yen, which we see as a signal an improvement in investor sentiment. Similarly,  emerging market currencies recovered considerably versus the US dollar. Our sense is that low inflation gives the Fed room to focus solely on the growth outlook, which should be a positive for investor sentiment.