Euro Snapshot and EMU GDP
The euro continues to be weighed down by the release of EMU fourth quarter GDP. The dismal showing for the 17 nation currency zone, -0.6% q/q and -0.9% y/y, was much lower than the -0.4% and -0.7% forecast. It is the fifth straight quarter of zero or negative economic growth in the EMU and the lowest of the series. But the euro's losses today owe as much to technical failures as to the worsening economic picture on the continent.
The united currency has lost just over 1.0% today top to bottom (1.3460-1.3315, 145 points) against the dollar but the majority of that loss (1.3460-1.3365, 95 points) came before the release of the EMU GDP data at 5:00 am New York time.
In Asia the euro barely moved. From the 1.3560 high in early Asian trading the euro had slowly skidded to 1.3440 by 7:00 am in London (2:00 am New York time). In a series of sharp moves lasting 20 minutes London traders sold the euro down 55 points to 1.3385. From there it recovered back to 1.3414 but on approach to 1.3400 again it quickly lost ground to 1.3380, lingered there for 30 minutes then sold off another 25 points to 1.3355.
Only at this point did the EMU GDP data fuel the selling from 1.3355 to the day's low of 1.3315, finishing what the London desks had started three hours before. It was as much the inability to hold the technical levels at 1.3450 and 1.3400 that contributed to the euro's losses today as it was the poor news from the currency zone economy.
The weakness of the EMU economies has been largely coincident with the spreading economic effects of the debt crisis. But until now Germany and to a lesser degree France had escaped the ravages of financial austerity, unemployment and falling economic activity. .
German GDP contracted 0.6% q/q in the final three months of 2012, slightly worse than the -0.5% prediction. It was the first negative quarter for Europe's largest economy since the final quarter of 2011, (Q1 0.5%, Q2 0.3%, Q3 0.2%, Q4 -0.6%).
Germany sends around 50% of its exports to fellow members of the European Union. With many of those countries in or near recession it is questionable whether the marginally better growth in the United States and China can make up the difference and keep Germany from recession in the next quarter.
French output shrank 0.3% in the fourth quarter, like Germany 0.1 worse than the forecast. Were it not for the 0.1% growth in the third quarter France would be closing out a year of negative economic production, (Q1 -0.1%, Q2 -0.1%, Q3 0.1%, Q4 -0.3%).
As poor as the performance numbers are from Germany and France more than anything else they reflect the split in the EMU between the central pair and the third and fourth largest economies in the union, Italy and Spain.
Italian GDP has been negative for six quarters with the worst reading -0.9% the latest. Over the year that ended in December the Italian economy shrank 2.7%. The same yearly figures for Germany and France are 0.4% and -0.3%. Spain is comparable to Italy. The economy contracted 0.7% in the fourth quarter, the sixth negative quarter in a row. Over the year GDP declined 1.8%.
The positive effect of ECB President Mario Draghi’s mid-summer verbal rescue of Spanish and Italian debt on the euro is beginning to wear off under threat of a new problem, the deepening recession in the entire currency bloc. Weak economic growth means lower tax receipts and higher social payments.
Spain and Italy may have escaped being cashiered by the credit markets last summer, but unless their economies begin to grow and soon, falling revenues could put them right back in the bond market sights.
Mr. Draghi may have been able to fend off the credit markets, a prolonged EMU recession will be a much more difficult opponent.
Chief Market Strategist