Why Manufacturing Continues to Weigh on Eurozone growth: It’s the Inventory Cycle, Stupid!

Economic

Summary:

We continue to believe that the winter months will see eurozone GDP stagnating on the back of the ongoing crisis in manufacturing.

Inventories gone wild

Admittedly, inventories may not seem like the most exciting topic at first glance. However, the past few years have been marked by multiple shocks, distorting the traditional inventory management model. After decades of reducing inventory-to-sales ratios in an increasingly integrated world economy ("The world is flat," remember that one?), the post-pandemic supply chain shocks led to the realisation that too low a level of inventories can cause major disruptions.

Increased geopolitical tensions have undoubtedly contributed to this sentiment. At the same time, inventories are costly. Thus, it remains a delicate balance between maintaining a comfortable level of inventory and avoiding excessive levels.

Manufacturing remains a major drag on growth

Where it becomes interesting for a macroeconomist is that inventory cycles can have a significant impact on GDP growth. Since the start of the Monetary Union, inventory changes have added between -1.4 and 0.9 percentage points to year-on-year GDP growth on a quarterly basis.

A lot depends of course on the mood in the manufacturing sector. Is there increased optimism, leading to more rapid stock building or does pessimism prevail, causing inventory reductions?

The eurozone manufacturing sector is going through a very difficult period, to put it mildly. Relatively high energy prices, the Inflation Reduction Act in the US (which has attracted investments to the US), insufficient domestic demand, and China exporting its excess capacity to the rest of the world, are weighing on sentiment. Since the last quarter of 2022, the added value in eurozone manufacturing has fallen by more than 7%. The uncertainty regarding potential import tariffs in the United States is not helping to reverse the situation rapidly.

High inventories are likely to impact GDP negatively

Why Manufacturing Continues to Weigh on Eurozone growth: It’s the Inventory Cycle, Stupid!_1

Continued struggles in the first quarter

The December survey of the European Commission showed weakened orders in the manufacturing sector, and the flash PMI indicated this trend continued in January. At the same time, the assessment of stock levels increased to a level last seen during the financial crisis. The combination of high inventories and falling demand is likely to weigh on growth, as companies will first try to reduce their inventories before producing more.

As the graph suggests, this could imply a significantly negative growth contribution from inventories in the first quarter. Admittedly, some of this negative impact will be offset by net exports, as inventories typically have a high import component (the PMI survey mentioned companies buying fewer inputs), but that will not erase the negative GDP impact entirely. The bottom line is that we continue to believe that the winter months will see eurozone GDP (at best) stagnating on the back of the ongoing crisis in manufacturing.

Downward pressure of retail inventories on goods inflation is petering out

Why Manufacturing Continues to Weigh on Eurozone growth: It’s the Inventory Cycle, Stupid!_2

Non-energy goods inflation bottoming out

While the inventory cycle will weigh on growth in the short run, an optimist might suggest that high inventories can also reduce goods inflation. Companies might be more willing to accept price concessions to get rid of excess inventories. This is certainly true, but when discussing consumer price inflation, it makes more sense to look specifically at inventories in the retail sector. Indeed, surveys on stock levels there have been a good leading indicator of goods price inflation.

While inventories are still perceived to be high, it doesn't appear that there will be much more downward impact on goods inflation.

Source:ING

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Jason

In the mercy of tariffs

The US dollar has staged a recovery this week, corroborating the notion that the latest pullback on news that Trump may adopt a softer stance on tariffs than his pre-inauguration rhetoric suggested, was just a corrective phase.

Tariffs remained the main driver, with Wednesday’s Fed decision adding some extra fuel to the rebound. After Colombia succumbed to Trump’s threats, investors’ concerns were amplified again, with many perhaps thinking that the US President may harden his rhetoric to get what he wants from the rest of the world. And indeed, Trump himself confirmed that view after he rejected reports that US Treasury secretary Scott Bessent is pushing for only 2.5% tariffs that would be gradually lifted to 20%, saying that tariffs would be “much bigger.”

In the shadows of the first imposition of 25% tariffs on Canadian and Mexican imports on February 1, the Fed decided on Wednesday to keep interest rates unchanged. At the press conference following the decision, Fed Chair Powell acknowledged signs of progress in reducing inflation, adding though that “non-market” prices remain stubbornly high and stressing that they are in no hurry to make further adjustments. They will wait for more clarity on the economic front as well as on government policy.

From around 50bps worth of rate reductions for this year, Fed fund futures are now pointing to 45bps as investors lifted only slightly the implied rate path. The next quarter-point reduction is still nearly fully priced in by June.

Nonfarm Payrolls enter the limelight

With all that in mind, attention next week is likely to fall on the NFP employment report for January. Powell noted that further labor market weakening is not needed for the inflation target to be met as the path for continued disinflation remains intact. However, he did not mention what will happen in the case of unexpected labor market tightening.

In December, the economy added 256k jobs, with average hourly earnings ticking down, but remaining elevated close to 4.0% y/y. Another round of strong employment and wage growth could intensify concerns about a resurgence of inflation in the months to come, especially if Trump kicks off the tariff game on February 1. Market participants are likely to start doubting again whether two rate cuts will be needed this year, which could allow the US dollar to extend its latest recovery.

The ISM manufacturing and non-manufacturing PMIs on Monday and Wednesday, as well as the ADP private employment report on Wednesday will also be closely monitored ahead of Friday’s NFP data.

Will the BoE opt for a hawkish cut?

After the BoJ, the Fed, the ECB and the BoC, it will be the BoE’s turn to hold its first policy decision for 2025. Following the concerns over the sustainability of the new government’s fiscal plans, where UK bonds and the pound tumbled on fears of a Truss 2.0 budget crisis, investors became more convinced that a rate cut would be appropriate at this gathering.

Taking also into account the cooler-than-expected CPI numbers for December and the sluggish UK growth, investors are now penciling in around a 90% chance of a quarter-point rate cut at this gathering, while anticipating nearly another two by the end of the year.

That said, both the headline and the core inflation rates remain above the Bank’s objective of 2%, with the latter standing at 3.2% y/y. What’s more, although the surge in bold yields was largely reversed, the pound recovered only a portion of its losses. It is actually the worst performing major currency so far this year, posing upside risks to UK inflation.

Therefore, even if the well-anticipated rate cut is delivered, it may be a hawkish cut, with the Bank revising up its inflation projections, especially with rent inflation remaining stagnant at 7.6% y/y and services inflation still above 4.0% y/y. Officials may signal that they will take their decisions meeting by meeting, avoiding to pre-commit to any future rate cuts. This may disappoint those expecting another two reductions this year and thereby allow the pound to gain some more ground.

Will the jobs data allow the BoC to take the sidelines?

At the same time with the US jobs data, Canada releases its own employment report for January. This week, the Bank of Canada trimmed interest rates by another 25bps and revised down its growth forecasts, noting that they are concerned about US tariffs.

However, they also added that tariffs could also stoke persistently high inflation, which led market participants to pencil in around a 50% probability for policymakers to take the sidelines at the next policy gathering in March.

In other words, the BoC will find itself between a rock and a hard place and Friday’s jobs report may help tilt the scale towards a pause or another rate cut, depending on whether it will come in strong or soft.

Eurozone CPIs, NZ employment and Japan’s wages

Flying from Canada to the Eurozone, the ECB also decided to reduce interest rates this week, noting that the disinflationary process is well on track and that the economy is still facing headwinds. In the statement, it was noted that the Bank is still not pre-committing to a particular rate path. At the post-decision conference, President Lagarde said that interest rates are still in restrictive territory and that there was no discussion on whether it’s time to stop reducing rates.

The market was quick to price in around an 85% chance for another quarter-point cut in March and should Monday’s flash CPI data reveal cooling inflation, that probability could go even higher, thereby weighing on the euro. Eurozone’s retail sales are also on next week’s agenda.

Elsewhere, during Tuesday’s Asian session, New Zealand’s employment report for Q4 could prove crucial on whether the RBNZ will cut by 25 or 50bps, while the following day, Japan’s wage data for December could shape expectations about the BoJ’s next rate increase.

On the earnings front, the tech-related reporting continues with Alphabet and AMD on Tuesday, and Amazon on Thursday.

Source: ACTIONFOREX

Risk Warnings and Disclaimers

Add to Favorites

Manuel

Economic

Political

Investors are bracing for a looming hit to U.S. corporate profits and pressure on inflation if President Donald Trump makes good on his tariff threats, with markets seen as not fully factoring in risks from higher levies on foreign imports.

President Donald Trump is vowing to issue tariffs as soon as Saturday on Canada, Mexico and China, the three largest U.S. trading partners.

As the tariff deadline nears, investors have been trying to gauge whether the potential duties on imports might be a negotiating tool, as Trump and members of his administration have addressed the topic over the past week.

"It's adding a lot of volatility to expectations because of the back and forth and the rhetoric on a daily basis," said Leo Harmon, chief investment officer at Mesirow Equity Management.

Harmon said he expects some level of tariffs to be implemented with the market reaction dependent on the extent of the duties.

"If those tariffs come in higher than expectations... there could be a potential for a day or two of risk-off leadership in the market," Harmon said.

Trump has set a Saturday deadline for issuing 25% tariffs on imports from Mexico and Canada, unless they move to halt flows of illegal immigrants and the deadly opioid fentanyl into the United States. He has also said he would impose a 10% tariff on Chinese goods over that country's role in the fentanyl trade.

On Friday, Trump said nothing could be done by the three countries to forestall the tariffs, although he did reference a potential carve out for oil from Canada.

Barclays strategists estimate that the tariffs could lead to a 2.8% drag on S&P 500 company earnings, including the projected fallout from retaliatory measures from the targeted countries.

"You're having global supply chains that are going to have to be reworked or rethought," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. "It can increase cost structures for companies."

Some tariffs will be passed on to consumers in the form of higher prices, LPL Research analysts said earlier this month.

Goldman Sachs economists have estimated that across-the-board tariffs on Canada and Mexico would imply a 0.7% increase in core inflation and a 0.4% hit to gross domestic product.

The potential to drive up consumer prices is a particularly sensitive area for investors, who are worried about a revival in inflation causing the Federal Reserve to stop cutting interest rates. The U.S. central bank this week paused its rate-cutting cycle, while Fed Chair Jerome Powell said officials were "waiting to see what policies are enacted" with the new president.

Gene Goldman, chief investment officer at Cetera Financial Group, said he expected weakness in equity markets if Trump goes through with tariffs this weekend.

"The combination of high valuations ... and the inflation-inducing effect of tariffs and the consequent effect on Fed policy would cause stocks to sell off," Goldman said.

Jim Smigiel, chief investment officer at SEI, said markets could start factoring in the possibility of interest rate rises if tariffs set off inflation.

"The non-zero probability of a hike I think has crept into investors' minds," Smigiel said.

With the S&P 500 near all-time highs, the index could move 3% to 5% in either direction in the short term, depending on what Trump announces with tariffs, Evercore ISI strategists said in a note.

Colin Graham, head of multi-asset strategies at Robeco in London, said the firm was debating closing a position in long-duration Treasuries before the weekend.

Some Wall Street analysts said the potential tariffs appeared to be being used more as a negotiating tactic.

“I think Trump is more bark than bite, and is trying to use the threat of penalties to hammer out better trade agreements with our major partners," said Talley Leger, chief market strategist at The Wealth Consulting Group.

Investors had braced for Trump to move swiftly to implement tariffs when his second term began on Jan. 20, and the lack of tariffs so far has been a relief for markets. Tariffs are seen as one of the more negative potential policies for stocks countering benefits stemming from Trump's expected pro-growth agenda of reduced taxes and regulations.

BCG Global Chief Economist Philipp Carlsson-Szlezak said 25% tariffs on Canada and Mexico "would be a jolt."

But, he said, "it would also at least bring some clarity of, how does the administration want to play tariffs?"

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Manuel

Commodity

Big Oil executives this week saw little prospect of a near-term improvement in refinery profits after Chevron, Exxon Mobil and Shell all reported fourth-quarter earnings that were hit hard by a downturn in the margins for producing fuel.

An increase in global refining capacity in 2024, combined with sputtering demand growth has hurt refining margins.

Chevron's shares declined 4% after it reported a loss in its refining business for the first time since 2020, causing the No. 2 U.S. oil producer to miss Wall Street's profit estimate.

"This trend we have seen of margins softening through 2024 is something you can expect to continue to see, to extend into 2025," Chevron CEO Mike Wirth said in an interview.

"It was a weak fourth-quarter, there's no doubt about it," he said on a post-earnings conference call in response to a question from an analyst about the refining downturn.

"I'm not going to call it a perfect storm, but it was a quarter in which everything went one way and it was negative."

Wirth said Chevron would focus on what it can control in order to bounce back, including lighter scheduled maintenance for refineries over the next year.

Exxon Mobil's shares fell 2.5% after it reported a 75% plunge in adjusted earnings from refining compared with the third quarter. The broader S&P 500 Energy Sector index was down 2.8% on Friday.

The refining business remains under pressure from additional fuel supply entering the market after new refineries opened in different countries around the world, said Exxon's Chief Financial Officer Kathryn Mikells in an interview.

"That's really what we're watching as we look ahead to 2025," she said.

The No. 1 U.S. oil producer still beat profit estimates with higher production from the Permian basin, the top U.S. oilfield, and Guyana, the latest oil hotspot.

UK-based Shell said on Thursday that while it had no plans to exit the refining business, it did not plan to expand either.

The company's fourth-quarter earnings nearly halved from the previous year to $3.66 billion, partly due to weaker refining margins.

Shell sold its refining and chemicals hub in Singapore last year and plans to shut down another plant in Wesseling, Germany.

HIT TO INDEPENDENT REFINERS

While higher oil and gas production helped cushion oil majors from the impact of lower refining profits, the pure-play refiners took a hit as fuel demand faltered in the U.S. and China, the two largest oil consumers.

Phillips 66's fourth quarter profit plummeted to $8 million from $1.26 billion in the year-ago quarter. Valero's refining profit dropped 73% in the fourth quarter.

Two U.S. refineries are set to close this year and limited capacity additions beyond 2025 will help support refining margins over the long term, said Valero CEO Lane Riggs on Thursday.

Investors were also worried about U.S. President Donald Trump's threats to impose tariffs on crude imports from Canada and Mexico on Feb. 1, which could raise costs for U.S. refiners.

French oil major TotalEnergies will report fourth quarter results on Feb. 5 and British oil producer BP reports on Feb. 11.

BP has warned that a drop in refining margins and the impact of turnaround and maintenance activity would result in an up to $300 million decrease in profit quarter-on-quarter.

Source: Reuters

Risk Warnings and Disclaimers

Add to Favorites

Manuel

Economic

Canada's economy contracted more than expected in November as activity across a majority of sectors shrank due to work stoppages in inland transportation and at ports, Statistics Canada said on Friday.

The country's gross domestic product shrunk by 0.2% in November on a monthly basis from a 0.3% rise in October, led by contraction in mining, quarrying, oil sands extraction and transportation, Statistics Canada said.

Analysts polled by Reuters had estimated the GDP to drop by 0.1% in November and economists foresee a bounce-back in December.

A preliminary estimate shows that GDP is likely to rebound by 0.2% in December, led by increases in retail trade, manufacturing and construction, the statistics agency said.

Currency swap markets showed traders trimmed the chances of a 25-basis-point rate cut by the Bank of Canada in March to 53.9% from 54.2% before the data were released.

The Canadian dollar was little changed at C$1.4468, or 69.12 U.S. cents.

The December figures will be announced next month when Statscan will also publish the fourth-quarter economic growth number.

According to its initial estimate, annualized fourth-quarter GDP is likely to be 1.8%, or similar to what the Bank of Canada had forecast in projections published this week.

The central bank has been concerned about the slow pickup in economic activity despite several rounds of rate cuts. It has reduced interest rates by a cumulative 200 basis points since June to 3%.

After announcing a 25-bps cut this week, Governor Tiff Macklem said growth was picking up, but it would want it to be sustained.

The bank revised its 2025 GDP growth forecast downward to 1.8% from 2.1% earlier, led by a decline in population this year.

The growth forecast figures can be further dented if U.S. President Donald Trump slaps a 25% tariff on all Canadian imports starting on Saturday.

The services-producing industries contracted by 0.1% in November, with transportation and warehousing leading the drop with a contraction of 1.3%, its largest decline in two years. This was led by a work stoppage in postal services and labor actions at ports, Statscan said.

Within the goods-producing industries, mining and quarrying and oil and gas extraction dropped by 1.6%.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Manuel

Central Bank

Economic

A fresh reading from the Federal Reserve's preferred inflation gauge showed prices remained sticky in the final month of 2024, a new data point that likely reinforces a current wait-and-see approach to interest rates.

The "core" Personal Consumption Expenditures (PCE) index, which strips out food and energy costs, rose 2.8% over the prior year during the month of December — stuck at the same year-over-year level recorded in November.

On a month-over-month basis, "core" PCE rose 0.2%, faster than the 0.1% seen in November. The annual and monthly figures were in line with Wall Street expectations.

The new sign that inflation isn't making dramatic movements up or down comes after the Fed this week decided to keep rates on hold, its first pause following three consecutive cuts at the end of 2024.

The pause is part of a new caution on the part of the central bank as it keeps one eye on inflation and the other on several unknowns about the economic policies of the new Trump administration.

Many Fed officials have made it clear they are increasingly concerned about signs of persistent inflation and how that could be affected by potential tariffs, immigrant deportations, and tax cuts. In December, officials scaled back the number of estimated cuts this year to two from four.

Fed governor Michelle Bowman said in a new speech Friday in New Hampshire before the new inflation numbers were released that she would like to see progress in lowering inflation before making "any further adjustments to the target range."

"As we enter a new phase in the process of moving the federal funds rate toward a more neutral policy stance, I would prefer that future adjustments to the policy rate be gradual," Bowman said.

Some analysts think the Fed is done cutting for the year.

"We remain comfortable with our call that the cutting cycle is over," Bank of America economists said in a research note Thursday.

Anticipating the December PCE inflation data earlier this week, Fed Chair Jerome Powell noted that the Fed would need to see more progress on inflation coming down before moving again on rates and that the central bank was going to take things slow.

"With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance," Powell said Wednesday during a press conference.

For her part, Bowman said Friday she is concerned that easier financial conditions over the past year may have contributed to slow progress on bringing down inflation.

"In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint," she said.

Bowman is also closely watching the increase in longer-term Treasury yields, noting that the jump in yields reflects some investors' fears that the Fed will have to keep interest rates higher for longer to bring down inflation.

A slower approach to lowering rates allows the Fed to get clarity on the Trump administration’s policies and their effects on the economy, Bowman added.

"It will be very important to have a better sense of the actual policies and how they will be implemented, in addition to greater confidence about how the economy will respond," she said.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Manuel

Political

Forex

The U.S. dollar advanced against major currencies on Friday, while the Canadian dollar weakened and the Mexican peso edged higher after the White House reiterated that President Donald Trump will impose tariffs on Saturday.

Trump would announce tariffs on Canadian and Mexican imports on Saturday but delay collection of the duties until March 1 and offer a limited process for certain imports to be exempted.

White House spokesperson Karoline Leavitt denied the report, calling it "false", adding that tariff duties would be published on Saturday and would take effect immediately.

Earlier on Friday, U.S. Commerce Department data showed that the Personal Consumption Expenditures (PCE) Price Index rose 0.3% last month, the largest increase since last April, amid a surge in consumer spending, suggesting the Federal Reserve would probably be in no hurry to resume cutting interest rates.

"It's very much tariffs and the administration that's driving this over-dollar-strength move; one of the biggest challenges is that the stronger dollar has been one trade that has sustained itself if you wanted to put out a theory that there's a Trump trade out there," said Marvin Loh, senior global market strategist at State Street in Boston.

"The dollar trade is one of the most overpositioned at this point. It does need a catalyst to continue to move up. But the threats and/or actions where we get to see tariffs over the weekend is what's driving the story now," Loh said.

The U.S. dollar advanced 0.12% against the Canadian dollar , rebounding from a slight decline following the Reuters report. The currency is still trading near five-year highs at C$1.451 and notched a weekly gain of nearly 1.1%.

The Mexican peso was up 0.17% at 20.728 per dollar. The currency recorded its worst weekly performance since October.

The dollar strengthened 0.54% to 155.13 against the Japanese yen, notching three straight weeks of gains. Against the Swiss franc, the dollar added 0.1% to 0.9016, gaining 0.5% for the week and snapping two consecutive weeks of losses.

The euro dipped 0.3% to $1.0367. It recorded a 1% weekly decline, the biggest loss since December 30. For the month, it was up 0.23% - the biggest gain since September last year.

Bank of Japan Governor Kazuo Ueda said the central bank must maintain loose monetary policy to ensure underlying inflation gradually accelerates toward its 2% target. Data on Friday showed core inflation in Tokyo hit 2.5%, the fastest annual pace in nearly a year.

The European Central Bank cut interest rates on Thursday and policymakers left the door open for another cut in March, as concerns over lacklustre economic growth supersede worries about persistent inflation.

The Federal Reserve, meanwhile, kept rates steady this week and Chair Jerome Powell said there would be no rush to cut them again, though he also implied there was still scope for easing with rates being "meaningfully" above neutral.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.31% to 108.42. It gained 0.93% for the week, snapping two straight weeks of losses.

"We were expecting maybe some volatility around the data releases this morning, the U.S. PCE and other things; but they were really in line and not much to write home about," said John Velis, FX and macro strategist at BNY in New York.

"It just seems like, based on what happened yesterday afternoon in the White House, that traders are looking not to take big risks going into the weekend because obviously tomorrow's February 1st," Velis added.

Source: Reuters

Risk Warnings and Disclaimers

Add to Favorites

Daily News

Remarks of Officials

Central Bank

Forex

FastBull Events

FastBull Featured

Devin

Mohammad Omar

Recent Searches

Top Searches

Markets

News

Analysis

User

24/7

Economic Calendar

Education

Data

Why Manufacturing Continues to Weigh on Eurozone growth: It’s the Inventory Cycle, Stupid!

Inventories gone wild

Manufacturing remains a major drag on growth

High inventories are likely to impact GDP negatively

Continued struggles in the first quarter

Downward pressure of retail inventories on goods inflation is petering out

Non-energy goods inflation bottoming out

Source:ING

Week Ahead – Nonfarm Payrolls And Boe Decision In The Spotlight

In the mercy of tariffs

Nonfarm Payrolls enter the limelight

Will the BoE opt for a hawkish cut?

Will the jobs data allow the BoC to take the sidelines?

Eurozone CPIs, NZ employment and Japan’s wages

Source: ACTIONFOREX

Looming tariffs Worry Wall Street Over Earnings hit, Inflation Pressure

Source: Reuters

Big Oil Bleak on Refining Profits Going Into 2025

HIT TO INDEPENDENT REFINERS

Source: Reuters

Canada's GDP Contracts by 0.2% in November, Likely Rebounded Following Month

Source: Reuters

New Inflation Reading Reinforces Fed's go Slow Strategy

Source: Reuters

Dollar Advances After White House reiterates Trump Tariff Threats

Source: Reuters

Risk Disclosure