Euro resumed its decline this morning against the US dollar, with a decline of 0.5% and reaching its lowest levels in a week at 1.09098 at approximately 10:30 a.m. GMT.
Euro’s declines today came after a series of data from euro zone economies, which confirmed that inflation is still declining, in addition to more signs of weakness in the French economy, at the expense of continuing positive signs about German consumer sentiment. Today’s numbers also helped put more pressure on European bond yields, which fell to their lowest levels in months.
While the euro resumed its decline today despite the positive numbers for German retail sales for the month of October, which carried some positive signs about German consumer sentiment.
Retail sales recorded a remarkable growth of 1.1% on a monthly basis, which was higher than the expected 0.4% and the highest reading since the revised reading last June. On an annual basis, retail sales contracted slightly by 0.1%, which was far from expectations of a 2% contraction.
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While the biggest support for retail sales was the noticeable growth in sales of non-food retail trade and mail and internet sales, by 1.4% and 2.9%, respectively, on a monthly basis. On the other hand, sales of food fell by 1.3%.
Today’s retail sales figures follow GfK’s Consumer Climate report which also indicated an improvement in consumer sentiment, an increase in the willingness to buy and some decline in the willingness to save, despite high inflation and tightening credit conditions.
These positive numbers for the consumer sector also coincide with the continued decline in inflation in Germany at a faster-than-expected rate, which we also witnessed yesterday through the preliminary reading of the CPI for November, which recorded the fastest pace of price contraction on an annual basis since December of last year.
I believe that the result of these numbers reinforces the hypothesis of a soft decline in inflation. The more robust the consumer sector and labor market are and still have the ability to spend, the more resilient the economy and financial system will be in the face of current obstacles – this is also confirmed by monetary policy officials – even though the restoration of growth does not seem imminent.
On the other hand, upside risk of inflation and rising energy prices in particular, in addition to the prevailing state of uncertainty regarding the economic situation, remain the biggest threat to consumer sentiment.
After the numbers we saw today from the German economy, the series of data from the French economy was somewhat bleak, which may have deepened the euro’s losses this morning. The CPI resumed its decline by 0.2% on a monthly basis, according to the preliminary reading, against expectations for a growth of 0.1%.
The decline in prices came with a further decline in the consumer spending, which fell by 0.9% last October on a monthly basis, which represents the fastest pace of decline since December of last year.
While this noticeable decline came under pressure from a decline in spending on food and energy, which fell by 1.5% and 2.5%, respectively, in exchange for an increase of 0.5% and 1% for spending on durable goods and transportation equipment, which shows some positive consumer sentiment despite high inflation and declined economic activity.
In addition, the GDP contracted by 0.1% during the third quarter compared to the previous quarter, which was below the expected growth of 0.1% and also represents the worst quarterly performance since the first quarter of the previous year.
Following this morning’s string of data, pressure on the euro has increased with a weaker than expected Eurozone CPI reading not seen in two years.
According to preliminary readings for November, inflation recorded the slowest pace of growth since July of 2021, at 2.4% on an annual basis, compared to expectations of 2.7%. On a monthly basis, prices contracted by 0.5%, which represents the largest contraction since January 2020.
The slower-than-expected growth of core inflation was also notable today, as its continued rise is a source of concern for monetary policymakers at the ECB. The CPI excluding food and energy items recorded a growth of 3.6%, which is the lowest since April of last year.
This data was ultimately reflected in a further decline in European bond yields. The yield on European government bonds fell to the level of 2.394% at approximately 9:00 a.m. GMT – just before the announcement of inflation figures in the eurozone – which represents the lowest level since late last July.
The euro may also come under further pressure as US Treasury yields rebound as well. The spread between ten-year US Treasury bond yields and their European equivalents also widened today to reach the level of 1.865%, after reaching the lowest levels in a month at 1.780% last Friday.
