German Factory Orders Unexpectedly Slide by 1.6% in May

The German economy was in focus on Thursday (July 4) after weaker-than-expected Services PMI numbers for June.

Will the German economy manage to avert a significant contraction?

German Factory Orders

German factory orders tumbled by 1.6% in May after declining by 0.6% in April. Economists expected factory orders to rise by 0.5%.

According to data from Destatis,

• In other vehicle construction, orders slumped by 19.2% in May due to lower aircraft-related orders.
• The automotive industry reported a 2.9% decline in new orders.
• Conversely, data processing equipment, electronic, and optical products saw an 11.2% jump in orders.

Looking at the broader sectors of the German economy and geographical demand:

• The capital goods sector saw orders fall by 4.3% in May.
• However, orders for intermediate and consumer goods increased by 1.4% and 4.9%, respectively.
• Foreign orders declined by 2.8%, with orders from non-Eurozone countries sliding by 4.6%.
• Domestic orders increased by 0.5%, while orders from Eurozone countries slipped by 0.1%.
• From March to May 2024, factory orders were down 6.2% compared with the previous three months.
• Excluding large orders, factory orders fell by 2.2% in May and were down 0.8% from March to May 2024 compared with the previous three months.

Factory order trends correlate with recent manufacturing sector PMI data from Germany. The German HCOB Manufacturing PMI fell from 45.4 in May to a 2-month low of 43.5 in June.

Will the ECB consider the persistent challenges in the manufacturing sector during its monetary policy deliberations?

German Factory Orders and the ECB Rate Path

The continued decline in demand for manufactured German goods is unlikely to influence the ECB interest rate trajectory. Manufacturing accounts for less than 30% of the German economy. The services sector, an inflation driver, will remain a focal point alongside wage growth, another ECB bugbear.

Yet, the latest manufacturing sector figures, along with recent HCOB Services PMI data, suggest concerns about a potential German recession.

The German HCOB Services PMI fell from 54.2 to 53.1 in June.

EUR/USD Reaction to the Factory Order Slide

Before the factory order report, the EUR/USD fell to a low of $1.07815 before climbing to a high of $1.07949.

However, in response to the factory order report, the EUR/USD rose to a high of $1.07910 before dropping to a low of $1.07850.

On Thursday, the EUR/USD was up 0.03% to $1.07876.

Next Up

Later in the session on Thursday, the ECB Monetary Policy Meeting Minutes will draw investor interest. However, the latest Eurozone inflation figures could discount any dovish sentiment. The Eurozone core inflation rate held steady at 2.9% in June, dashing investor hopes of a July ECB rate cut.

Meanwhile, ECB Chief Economist Philip Lane could influence sentiment toward the ECB rate path. Reaction to the Euro area inflation and Services PMIs need consideration.

Beyond the economic calendar, investors should monitor French Election-related updates. Progress toward averting a far-right absolute majority could ease stress across the European markets.