Demand Is Fading

Preliminary data released on Friday indicates a slowdown in business activity growth in Europe, suggesting a challenging end to the second quarter. The flash composite Purchasing Managers' Index (PMI) for the euro zone declined to 50.3 in June, down from 52.8 in the previous month, falling short of the 52.5 forecasted by analysts. A reading above 50 signifies an expansion in activity, while a reading below 50 indicates a contraction.

  • S&P Global, in its release, stated that Eurozone business output growth came close to stalling in June. This indicates renewed weakness in the economy following a brief period of growth in the spring.
  • Concerns over demand growth, particularly the impact of higher interest rates and the potential for recessions in both domestic and international markets, have escalated during June, outweighing the easing of energy and supply chain worries since late last year.

Rates Are Starting To Bite

Chris Williamson, the chief business economist at S&P Global Market Intelligence, expressed concern over the numbers, stating that higher interest rates and the rising cost of living are starting to take their toll on the economy.

  • The European Central Bank's consistent increase in interest rates over the past 12 months, aimed at curbing inflation, has created higher costs for companies across the region, becoming a hindrance to output.
  • Individual country data from Germany also revealed a slowdown in Europe's largest economy. The German flash composite PMIs dropped to 50.8 in June from 53.9 in May, falling short of market expectations.
  • Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, noted that these figures align with their view that Germany's GDP growth will remain subdued in the second and third quarters following a technical recession in the first quarter of the year when the economy contracted by 0.3%. Germany's economy had also shrunk by 0.5% in the final quarter of 2022.
  • France experienced a similar trend, with the composite PMI sinking to 47.3 in June, down from 51.2 in May, significantly below the expected 51. This decline was primarily attributed to weakness in the services sector.

The release of the German and French data led to a drop in Eurozone bond yields. Economic slowdowns typically have a negative impact on bond yields. Consequently, the yield on the 2-year German bund declined by 6.5 basis points to 3.21%.

Falling Yields, Subdued Demand

Falling yields and slower demand growth can finally spur central banks to tame their rates increase. A hard recession may not be the talk of the day as household debt is at acceptable levels in the U.S. and Europe.

  • We therefor remain bullish on sectors and stocks that perform well in a falling rates enviroment.
  • We continue to monitor unemployment rates, hours worked, the labour participation rate and the private debt to GDP in order to have a sense of where risks could arise.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

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