EU data on the soft side

The latest batch of European data does not paint a bright picture of the economy. The first signs of weakness came from German when manufacturing PMIs dropped below the 50 threshold and economic growth contracted in the second quarter. On the other hand, it seems that the weakness was contained to Germany as France, Portugal and even Spain appeared surprisingly resilient. However, some cracks are appearing in the other economies as well, especially in the industrial and manufacturing sectors. In July, Italy’s industrial production contracted 0.7%y/y (versus +0.3% expected and -1.2% in June), France’s gauge fell -0.2%y/y (+0.5% exp. and -0.1% in June), while the German one dropped 4.2%y/y compared to -3.9% forecasted and -1.1% in the previous month. However, this weakness may be due to temporary factors, it is still too early to determine.

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The market is waiting for the ECB bazooka stimulus that should be announced on Thursday. The recent weakness, together with the collapse of inflation expectation - 5y5y swap rate fell to 0.99% compared to 1.59% at the beginning of the year – clear up any doubts that the ECB will under deliver. We are convinced that the ECB announce the full package, i.e. 20bps cut to the deposit rate and a return to QE on corporate and sovereign debt with substantial buying. Against such a backdrop, the euro should experience further weakness; while equities should get a boost (one should remain careful with banks, though).