German factory orders experienced a significant decline of 11.7% in July.

Following an unexpected surge in June, German factory orders experienced a reversal in the latest report, indicating a decline in demand across the majority of economic sectors.

Highlights

• Factory orders in Germany saw a sharp drop of 11.7% during the month of July.
• The report for July indicated a lack of demand in the majority of sectors.
• In contrast to the overall trend, orders for motor vehicles, trailers, and semi-trailers increased by 2.7%.

German Factory Orders

The focus this morning was on German factory orders. After an unexpected surge of 7.6% in June, the latest report indicates a sharp decline in July due to weak demand.

In July, factory orders decreased by 11.7%, which was higher than the forecasted 4% decline.

According to Destatis:

• Orders for the production of other transport equipment experienced a significant slump of 54.5% (compared to a growth of 72.4% in June).
• Orders for computer, electronic, and optical products also slid by 23.6%.
• There were notable declines in orders for machinery (-8.7%), electrical equipment (-16.7%), and fabricated metal products (excluding machinery and equipment) (-14.2%).
• However, orders for the production of motor vehicles, trailers, and semi-trailers increased by 2.7%.

Foreign orders declined by 12.9%, while orders from the euro area slumped by 24.4%. Orders from the rest of the world fell by 4.1%, and domestic orders dropped by 9.7%.

These latest figures from Germany further support expectations of an economic recession. ECB President Lagarde remains concerned about high inflation, although bets on a September ECB interest rate hike have eased.

The decline in the service and manufacturing sectors, along with reduced factory orders, might prompt the ECB to reconsider rate hikes. Higher ECB interest rates could increase borrowing costs, impacting the profitability, investments, and hiring plans of businesses.

EUR/USD Reaction to German Factory Orders

Prior to the release of the factory order report, the EUR/USD pair initially decreased to $1.07131 but later rebounded to $1.07386.

However, in response to the German factory orders, the EUR/USD pair fell from $1.07380 to $1.07275.

Currently, the EUR/USD is up 0.08% at $1.07307.

Up Next

Later today, there will be interest in Eurozone retail sales, with economists predicting a decline of 0.1%. A downward trend in retail sales could alleviate inflationary pressures driven by demand and reduce the pressure on the ECB to raise rates.

Considering the current inflation and interest rate levels, a weaker labor market may lead to reduced consumer spending, which could impact overall consumption.

Following the latest economic indicators from the euro area, ECB commentary is expected to influence market expectations regarding ECB policy. ECB Executive Board Member Elizabeth McCaul is scheduled to speak today.

The Final Say: US ISM Non-Manufacturing PMI The US ISM Non-Manufacturing PMI, a critical factor for market sentiment, will follow the PMIs from China and the euro area. A notable slowdown in the US service sector, which represents over 70% of the economy, could disrupt markets. Economists predict the PMI to decrease from 52.7 to 52.5 in August.

While other statistics such as the finalized S&P Global service and composite PMIs, as well as trade data, are relevant, the ISM Non-Manufacturing PMI is expected to overshadow them.