Market Overview

European Service Sector Contracts Further, German Factory Orders Plummet

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New data released early Tuesday showed that the European service sector contracted further in October, as the pan-eurozone service PMI fell for a ninth consecutive month. The eurozone services PMI fell to 46.0 in October, below economist expectations of a flat reading month-over-month of 46.2. Germany and France were responsible for weakness in the broad measure while Spanish and Italian service sectors contracted less than expected in October.

Looking at key countries covered in the survey, the German and French service sectors were unexpectedly weak in October. The German services PMI fell to 48.4 in October from 49.3 in September with economists forecasting a flat reading month-over-month at 49.3. Also, the French services PMI unexpectedly dropped rather markedly in October, falling to 44.6 in October from 46.2 in September. Economists had been forecasting a flat reading at 46.2.

However, the Spanish and Italian service sectors performed better than expected in October. Spain's services PMI actually increased in October to 41.2 from 40.2 in September as economists were looking for a flat reading at 40.2. Also, Italy's service sector contracted at a much slower pace in October than in September, as the services PMI increased sharply to 46.0 from 44.5 in September. Economists had also expected a flat reading of 44.5.

In addition, data from Germany released early Tuesday showed that the manufacturing sector saw a sharp drop in output in October. German factory orders fell 3.3 percent from September to October, much worse than economist expectations of a 0.5 percent drop and much worse than the previous rate of contraction of 0.8 percent seen in September. Germany has been Europe's one source of growth since the continent attempted to quell its debt crisis with austerity, however recent weakness in Germany does not bode well for these efforts.

The combined data points paint a similar picture of the eurozone economy to the one that has been seen over the past few months. Although economists had predicted flat readings in the service economies of the big four eurozone economies, the net effect of two misses and two beats sent the pan-eurozone PMI lower month-over-month, but only slightly so. However, the sharp drop in German factory orders in October is worrisome. Should the German manufacturing machine, the lone engine of eurozone growth over the past year or so, continue to slow, it could spill over into global trade and further weaken the global economy.

More data will help to clarify the state of the European economy this week. Investors will get data on German industrial production, which could be lower seeing as the factory orders data was terrible. Also, the ECB interest rate decision is due out this week and also trade data will provide further insight into the state of the global economy.

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