PMI data published earlier today for the Eurozone shows that the European economy has not yet bottomed with manufacturing continuing to contract and so suggesting a negative GDP print is likely for the third quarter. The main PMI composite index declined for the eighth month running in September to 45.9 from 46.3. Services activity fell at the fastest rate since July 2009 while production slowed its rate of decline.
PMI data is usually a pretty accurate gauge for final GDP results. When staying below 50 for many months, GDP usually prints a negative number. The recent PMI data is now back at 2009 levels when the Eurozone was in recession and so adding to the weight of evidence that the Eurozone is likely currently in recession; this would be the second consecutive negative quarter in fact.
Behind the numbers, we have Germany recovering and France submerging. While manufacturing PMI data recovered from 44.7 to 47.3 in Germany, it decreased from 46.0 to 42.6 in France. Similarly the services PMI recovered from 48.3 to 50.6 in Germany, but dropped from 49.2 to 46.1 in France.
The data released this morning had a negative impact, especially in the French market that remained weak all day. In Germany, in contrast, the reaction was positive, although the DAX later lost steam in sympathy with US markets.
The DAX has in fact been a star performer this year with a 25.3% rise YTD, while the CAC has advanced just 11.77%. Recent economic data not only explains the difference in performance between these two countries but also points to a likely continuing divergence at the economic level. Germany has been showing much better manufacturing and services data and even though the latest indicators point to some weaknesses in the country, it continues to outperform most other EU economies.
Since the beginning of 2009, the DAX has now risen almost 50%, while the CAC is up by only a modest 5%. Both markets used to move in tandem but since the bottom hit in 2009, recovery from the crisis has been much more powerful in Germany. It could in fact be time to consider a pairs trade of long CAC short Dax?