Declining German Producer Prices Pushes the Euro to Further Decline

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This is a guest post by Samer Hasn, Market Analyst and part of the Research Team at XS.com

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After achieving some early gains this morning, the euro reflected its path and a decrease against the dollar (EUR/USD) by 0.16%.

Euro declines today comes amid a mixture of data that indicated more disinflation in conjunction with the declining pessimism of the German consumers in addition to the sharp decline in the Eurozone bond yields.

Today we have seen the figures of the GfK Consumer Climate for the month of December. Where the headline reading of the Consumer Climate Index recorded the highest level since last August at 25.1 – it was also higher than the expectations of -27.

GFK report indicated that the German consumer has become less pessimistic compared to the previous months or the similar period last year with regard to income and economic expectations and more willingness to buy or even to save more due to the prevailing uncertainty.

The consumer expert of the Nuremberg Institute for Market Decisions (NIM), Rolf Bürkl, commented on today’s report by saying that these figures are the beginning towards recovering consumer sentiment. While he said that the levels of sentiment that are still very low come from geopolitical crises and high food prices in addition to the political dispute over the budget of next year.

While this rise in consumer sentiment came mainly with the noticeable height of income expectations (decrease in pessimism around income expectations) this month to -6.9, which is a noticeable improvement compared to -16.7 in November and -43.4 for the same period last year.

This rise in income expectations, came with more noticeable growth expectations for individuals’ income from salaries, wages and pensions. While this rise in income expectations caused the rise of the willingness to buy also to -8.8, which is also a noticeable improved record in November at -15 and December of last year at -16.3.

Despite the rise in the willingness to buy and income expectations that the German consumer still wants more to save, this may be due to the continued state of uncertainty about the future of the economy and the region. A factor also may be important is the high interest rates that may encourage individuals more to save, especially with the continued decline of inflation, which has brought the real interest rates to the highest levels since 2007.

Economic expectations also flourished and gradually approached the direction to optimism instead of the current pessimism, which decreased to -0.4 compared to -2.3 last month -10.3 in December last year. However, the report has indicated that consumers are still cautious about the future of the German economy.

As these economic expectations, which are still pessimistic, are in line with the recent data and reports, which indicated more contraction in various economic activities in addition to the return of weakness to the sentiment of investors about the future of the German economy in the first half of the year, according to the last ZEW Economic Sentiment report.

Today also, the German economy provided more signals on the direction of inflation towards more decline, with a weaker reading of the Producer Price Index (PPI) for the month of November. Where the price of producers recorded the fastest pace for the monthly decline since last July, at 0.5%, which was without expectations to shrink by 0.2%. On an annual basis, prices have shrunk by 7.9% as well.

This decline in producers’ prices came with the sharp decline in energy, electricity and intermediate goods during the last month, according to the Destatis report.

As energy prices fell by 21.4% during November on an annual basis and 1.4% on a monthly basis, which are numbers that were almost recorded by the prices of natural gas in distribution. Electricity prices fell by 30.8% on an annual basis and 1.5% on a monthly basis as well.

On the other hand, food prices are still 3.4% on an annual basis with a decrease of 0.1% on a monthly basis. The prices of durable goods, whether consumer or capital goods, also recorded more on an annual basis by 4% and 4.2%, respectively.

The declining inflation in conjunction with the continuous recovery of the consumer confidence would enhance the hypothesis of the of soft landing if inflation in Germany. This is because the continued increase in the willingness of individuals to spending continues to support the German economy and financial stability, ahead of regaining growth without going through the recession stage, and this is confirmed by monetary policy makers as well.

While the decline in the Eurozone bond yields to more lower levels in months, in addition to German inflation figures, formed further pressure on the euro today and pushing it to give up the gains he recorded during earlier today.

Where the yield of 10-year German Bunds recorded the lowest level that we have not seen since last March at 1.973%, after it tried to recover earlier this morning.

The yield 10-year Italian bonds for ten years continued the sharp decline today and reached the lowest level since August last year at 3.587%. As for the yield of the Spanish bonds for the same term, today it is set to erase all the gains of the current year, reaching the level of 2.922%. French bond yields also recorded lowest levels since last February, when they reached the level of 2.481% today.

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