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Economy in Brief

German Factory Orders Fall in June as the Brexit Vote in the U.K. Shifts to Favor "Out"
by Robert Brusca  June 6, 2016

The Brexit imbroglio Of course the anticipated Brexit vote has almost nothing to do with German factory orders in April. But weak factory orders and the growing prospect of an "out" vote in the U.K. indicate risk to growth in the Euro-Area may be increasing. The German order trend is disturbing since this is Europe's most competitive economy. If Germany is doing this badly one can only imagine what is happening as we move down the pecking order of competitiveness in EMU. And then Brexit simply raises a whole host of fears about what events will be set in motion should the U.K. really opt out of EU. Indeed, it is notable that so many officials and corporate leaders have been speaking out on this subject mostly in favor of "In". Yet at the same time the polls show there is a tilt to "out" that is growing. Is the U.K. having some of the same crisis of confidence that the US is experiencing and are its leaders prone to be less trusted. Is their endorsement of "In" vote viewed as an attempt to manipulate the vote and being seen cynically by potential voters? The US has two now famous outsiders, Bernie Sanders and Donald Trump riding huge waves of voter discontent with mainstream politics in the US. Does the U.K. have a similar problem?

German orders drop German factory orders fell by 2% in April. They have been falling every other month since November of last year. Orders are shrinking on all horizons over 12-months, over six-month and over 3-months. If there is a silver lining in every cloud this month may have two. One is that despite this steady barrage of declining orders that is caused by ongoing deceleration of orders from the foreign sector. German domestic orders continue to advance and even are accelerating. That divergence is quite remarkable. The other bit of "good news" is a story from inside the weak foreign order trend as German foreign orders from countries of the EMU area rose. The foreign sector weakness is coming from areas outside EMU. It is good news indeed that there is an increase in demand from other countries inside the EMU region.

Foreign orders Foreign orders fell 4.3 percent on the previous month. Within foreign demand, new orders from inside the Euro-Area increased by 2.5 percent month-on-month; new orders from other countries, outside the Euro-Area, fell by a sharp 8.3 percent.

Orders by type Arrayed by type, orders for intermediate goods rose by a smart 4.8 percent, while capital goods orders, usually the core of strength in this report, fell by a very sharp 6.1 percent. Consumer goods, saw a decrease in new orders of 1 percent on the month.

Real sector sales in April German real sector sales were spotty across sectors in April with overall mining/manufacturing sales up by 0.8% in April after falling for two months in a row. Consumer real sector sales fell on the back of very weak nondurables in the month Capital goods industrial sales were strong gaining 2.7% as intermediate goods sales crawled lower, falling for the second month in a row.

Real Sector Sales trends Although real sector sales are up year-on-year they are falling on balance over 6-months and over 3-months, showing more weakness over these recent time slots. Consumer goods sales are lower on all horizons and that weakness builds on a year-over-year decline made at this time of year one year ago-that extends the trend of weakness for consumer sales over a 24 month period. Consumer nondurable sales are weak on all those horizons while durable goods sales are only falling over 3-months and 6-months. Capital goods real sector sales are rising on all horizons and are showing only a slight trace of downshifting on that timeline. Intermediate goods sales are falling and decelerating from one-year to three-months.

Factory orders and PMI on same page The PMI data have been signaling still very sluggish growth in the EMU area and these order data which are not quite as topical as PMI data nonetheless continue to rubber-stamp the PMI analysis showing Euro-Area lethargy but also Euro-Area growth.

Investor confidence is up in the Euro Area Investor confidence in the Euro-Area was on the rise in June as the Sentix index rose to 9.9 from 6.2 in May, a very solid monthly pickup that well-exceeded expectations. Will it hold up in the face of the new Brexit poll?

New Brexit poll leans to "out" And while it would be nice to stop here on this up-note it is important to point out at there are market instabilities and pound sterling weakened today on the back of the new Brexit poll that shows that "out" vote is now out in front. "out" is leading "In" by a 4-to 5-percentage point margin according to online polls by ICM and YouGov. Sterling has dropped to a three week low Vs the U.S. dollar which itself has been dropping in the wake of a weak U.S. job report announced last Friday.

Data and events summary: In with the in-crowd? There is never a dull moment in markets these days. The German orders data cast a pall over the state of the economic environment but some of that is lifted by the detail of the report that suggests that the Euro-Area may be affected more by the fall-out from weakness elsewhere rather than being the actual epicenter of the weakness. Still, the impact of global weakness on German orders and the rest of Europe is clear. The falling dollar poses another hurdle as it will rob Europe of some of its competitiveness and the weak US jobs report may mean weakness in an important EMU export market as well. The cherry on top of this bad-news sundae is the Brexit vote with largely unknown but much feared fall out. Perhaps it is worth noting that online polls may not be representative of the mood of the actual group that will go to the polls and cast a ballot on the issue. It is always hard to make these polls representative. But we have seen and heard from a lot of high level officials. The high profile CEO-banker Jamie Dimon has just recently traveled to the U.K to give a pro "In" speech and to warn of the potential job losses in the U.K. in the event of an "out" vote. It appears that many people are of the view that the "out" vote is gaining momentum and this is not just a one-off result of a poll that may not be representative.

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