Unemployment Continues to Fall in Eurozone Despite Data Slowdown Fears

Declining Eurozone unemployment is a bright spot in an otherwise dour data landscape which recently saw inflation figures fall below zero and an unexpected drop in manufacturing activity.

The Unemployment Rate in the 19-country euro-zone fell to 10.3% in January, from 10.4% in December.

The basis point drop to 10.3% beat analysts’ consensus estimates of the rate remaining unchanged at 10.4%.

It was the third consecutive fall in unemployment, which fell to its lowest rate since August 2011.

The unemployment rate in the 28-country EU fell to 8.9%, from 9.0% in December and the lowest since May 2009. 

The actual number of unemployed in the euro-zone fell by 105,000 to 16.65 million.

Germany had the lowest Unemployment at 4.3% whilst Greece had the highest at 24.6%.

France’s Unemployment Rate was one of the few which actually rose, increasing to 10.2 in January from 10.1 in December.

Latvia and Lithuania also saw their rates rise – from 10.1 to 10.4 and 8.9 to 9.0 respectively.

Italy’s Rate fell to 11.5 from 11.6 and Spain to 20.3 from 20.4 previously. 

Disappointing Data Elsewhere

Eurozone Manufacturing PMI fell to its weakest pace for a year in February, according to data from financial information provider Markit.

The data showed, “..expansions in production, new orders, new export business and employment all lost momentum.”

Figures showed Manufacturing PMI for the eurozone dropped to 51.2 from 52.3 in January.

Of particular concern was the lack of growth in the two largest euro-zone economies, France and Germany:

“The subdued performance of the ‘big-two’ nations also weighed on the euro area PMI, with growth in both Germany and France only slightly above the stagnation mark.”

Impact on Jobs

Even more worrying was the potential impact the slow-down in manufacturing could have on the job market, after figures showed German manufacturers laying of staff for the first time in one and a half years.

Some market commentators saw this as a sign that this could slow the decline in unemployment as businesses become more cautious about taking on new staff.

Chris Williamson, Markit's chief economist said: “Lacklustre domestic demand is being compounded by a worsening global picture. 

"Exports either fell or rose more slowly in all countries surveyed with the sole exception of Austria.”

Price deflation is happening as firms become desperate to offload stock:

“Prices are meanwhile being dropped as firms endeavour to boost sales, suggesting deflationary pressures have intensified. Input prices are falling at a rate not seen since July 2009.”

He saw the data as adding pressure on the ECB to act with more aggressive easing at its March meeting:

“With all indicators – from output and demand to employment and prices – turning down, the survey will add pressure on the ECB to act quickly and aggressively to avert another economic downturn.”

The Return of Deflation

Eurozone CPI data released on Monday showed average prices in the region slipping into negative territory in February.

CPI registered a -0.2% fall on an annualized basis, compared to February 2015.

Core Inflation, meanwhile, saw a significant decline to 0.7% from 1.0% previously, and both undershot expectations.

The drop in Core Inflation was a sign the price declines were not all due to falling commodity prices.

The European Central Bank is expected to announce more stimulus measures at its meeting on March 10.

This will probably mean more quantitative easing - buying financial assets with newly created money.

Another expected measure is a further cut to its bank deposit rate, which is already in negative territory.

This means commercial banks have to pay the ECB 0.3% (currently) for depositing their reserves with them, in the hope they will choose instead to lend more to the wider economy.

Several bank analysts are calling for a -0.1% cut in the deposit rate to -0.4% and a raise in monthly bond purchases of 10bn.

Concerns that there are an insufficient supply of bonds for the ECB to purchase have been dismissed after the ECB widened its criteria for eligibility in December, to include municipal bonds; and there are some analysts who theorize a further widening of eligibility criteria to include corporate bonds.

Whatever, the response from the ECB, what now seems certain is that it will be robust, given the recent stream of lacklustre data.

Petr Krpata of ING Bank neatly summed up the outlook for the single currency in a note on Tuesday morning:

“The spectre of the ECB delivering next week should keep EUR under pressure during the week.”

Abn Amro expect a much bigger response from the ECB than markets are pricing in, since they say the central bank will be keen to bring down the exchange rate:

“We think that the weak inflation data adds to the already strong case for the ECB to significantly step up its monetary stimulus.

“We think it will act more aggressively than currently expected.

“Getting the euro back down is the only way to get core inflation up significantly over the coming months, but that is not going to be easy given the Fed is likely to be on hold and some ECB easing is already priced in.

“In addition, the ECB needs to provide a strong signal that it will do whatever it takes in order to push up long-term inflation expectations.”

They now believe the ECB will cut the deposit rate by 20 basis points – not 10 as the market expects – and perhaps by a further 20 in June:

“Our base case is that the ECB will cut its deposit rate by 20bp in March and by another 20bp in June. We expect measures to cushion the blow for banks. A tiered deposit rate system and even longer duration refi loans look likely. Finally, we expect a EUR 10bn increase in monthly asset purchases and an extension of the programme to June 2017. This will be facilitated by removing the deposit rate floor for asset purchases.”

Technical's also Keeling

Along with the worsening fundamental outlook there has been a corollary worsening in the technical picture for many Euro pairs.

According to Ralf Umlauf of Helaba research:

“The euro continues to trend relatively weak, not only against the US dollar but also against the Japanese yen. The EUR/USD technical picture has further deteriorated following the break below December's uptrend even though the MACD and DMI have still not triggered sell signals in the weekly chart."

He now sees the EUR/USD as finding a new habitat in the 1.08s:

“Next supports below 1.0850 (61.8% retracement) would be around 1.0810. Our favoured trading range: 1.0810 - 1.0970.”

Online lender Swissquote see a move back down to the floor of the range at the 1.05 lows as probable:

“The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).”

The GBP/EUR rate has stalled at the 200-week MA and now broken out above a multi-month descending channel, in a bullish breakout move which is expected to see the pair rise up to 1.3000.

EUR/CAD is showing bearish deterioration on the weekly chart, after it made a considerable recovery during 2015, although this week needs to end negatively to ‘seal the deal’.