The EUR has suffered its worst start to a year since 2015, due to weaker-than-expected economic data and a fresh wave of political uncertainty (Germany)
Euro area employment growth was strong in Q4:2019 -- despite a further deceleration in real GDP growth -- albeit the ongoing economic weakness, if sustained, could pose challenges ahead vis-à-vis the health of the labor market. Specifically, the annual pace of growth of employment in the euro area was steady at +1% yoy in Q4:19. Sequentially, some signs of improvement emerged, with employment accelerating by 0.6 pps to +1.1% on a quarterly annualized basis. Recall that the euro area unemployment rate declined by 0.1 pp in December (-0.4 pps yoy) to 7.4%, the lowest rate since May 2008.
On the other hand, the 2nd preliminary estimate for Q4:19 GDP was revised down, by 0.2 pps to +0.2% qoq saar. As a result, the annual pace of growth was also revised down, by 0.1 pp to +0.9% yoy, the weakest outcome since Q4:13. Note that the detailed data per expenditure component are due on March 10th. On a country basis, according to data currently to hand, particularly weak readings occurred in Germany (29% of euro area GDP: +0.1% qoq saar | +0.4% yoy), France (20% of total: -0.3% qoq saar | +0.8% yoy) and Italy (-1.3% qoq saar | flat on an annual basis).
Regarding Germany and according to Destatis (details will be released on February 25th), household and government consumption slowed significantly compared with Q3. Regarding business investment, gross fixed capital formation in machinery and equipment was down considerably compared with Q3, while fixed capital formation in construction and other fixed assets continued to increase. Finally, the contribution of net exports was negative in Q4, as exports were down slightly, while imports of goods and services increased relative to the third quarter of the year. Investors’ attention will turn to the February PMI release (due on Friday), with consensus expecting a modest decline to 50.6 from 51.2 at the composite level, due to disruption caused by COVID-19.
Global equity markets recorded new highs in the past week, despite the fact that confirmed cases of COVID-19 continue to increase, albeit at a slower pace. Better-than-expected company earnings added to the positive sentiment. Indeed, 72% out of 392 S&P500 companies have surpassed analysts’ estimates. As a result, consensus EPS expectations for Q4:19 have increased to +0.9% yoy from -2% yoy at the beginning of the earnings season and from -2.2% yoy in the previous quarter. Moreover, guidance for Q1:2020 EPS remains at historic norms (67% negative). Overall, the S&P500 rose by 1.6% in the past week (5% YtD) and the Stoxx600 was up by 1.4% (4% YtD). Consensus estimates for S&P500 2020 $EPS are circa $176 (+8% growth vs 2019).
Safe havens were broadly flat in the past week, with Gold prices at $1584/ounce (+4% YtD). Core Government bond yields were little changed with the US 10-year bond yield at 1.59% and the German 10-year yield at -0.4%. Periphery bond spreads vs Bund in the 10-year tenor were also flat, with the exception of Greece, where 10-year GGB spread declined by 10 bps to 134 bps (10-year yield: -11 bps to 0.94%). Finally, the euro exchange rate depreciated sharply both against the US dollar ($1.08) and against the GBP (€0.83), with the latter finding support from heightened expectations regarding aggressive fiscal stimulus (see graph).