Here Comes The European Triple-Dip: Negative German GDP Sends Bunds Under 1% For The First Time Ever

The hammer finally hit for Europe when overnight both Germany and France reported Q2 GDP prints that missed expectations, the first actually contracting at a 0.2% rate with consensus looking for -0.1%, while France remained flat vs expectations for a tiny 0.1% rise. As a reminder, this GDP is the revised one, whichalready includes the estimated contribution of drugs and prostitution, suggesting the actual underlying economic growth is far worse than even reported. Then again, this is hardly surprising considering all the abysmal data out of Europe and the rest of the world in recent weeks, and with the Russian trade war sure to trim even more growth, look for all of Europe to join Italy in its first upcoming triple-dip recession in history.

Goldman’s take: Euro area GDP was flat in Q2 (+0.05 on a two-decimal basis), slightly below our and the consensus expectation of a more moderate positive expansion (Cons, GS: +0.1%qoq). The weaker-than-expected German and French GDP releases earlier this morning pointed to a flat or slightly negative area-wide GDP outturn. GDP contracted slightly or was flat in the major Euro area economies apart from Spain (where growth was robust). Eurostat releases the expenditure breakdown on September 3.

1. The first estimate of Euro area GDP for Q2 printed flat, following a +0.2%qoq (unrevised) reading in Q1. This outturn is marginally below our and the consensus expectation (made prior to the release of German/French data earlier today).
2. Today’s GDP release does not contain an area-wide expenditure breakdown (due on September 3). The French breakdown is already available and showed weakness in investment, in particular construction, and net exports, while consumption was robust. The German statistical office hinted that the weakness in Q2 was also driven by weak net exports and investments. In particular, weather distortions owing to a mild winter boosting output temporary in Q1 likely weighed on construction spending in Q2 in Germany. German private consumption also appears to have expanded in Q2.
3. The country breakdown for Q2 GDP showed mixed, but overall weak, developments. German and Italian GDP contracted by 0.2%qoq, while French GDP was flat. Spanish Q2 GDP (released in late July), in contrast, grew robustly by +0.6%qoq. While German and Italian GDP showed similar surprisingly weak developments, we view the German Q2 weakness as reflecting weather distortions (owing to a warm winter) and temporary manufacturing weakness. We continue to view the short-term German outlook as solid (see here). The Italian outlook remains considerably less optimistic, although the Q2 GDP appears somewhat weaker than implied by the business surveys (see here). French GDP in Q1 was only marginally weaker-than-expected, while Spanish GDP was slightly stronger.
4. The Q2 GDP data for smaller Euro area countries were more encouraging. Dutch and Portuguese GDP expanded robustly by 0.5%/0.6%qoq, rebounding from a similar-sized decline in Q1. Small positive expansions were recorded in Belgium, Finland and Austria. There is no official growth estimate of Greek sequential GDP, but the improvement in year-on-year growth suggests positive GDP developments between Q1 and Q2. Irish Q2 GDP is not available as of yet.
5. Area-wide business surveys were more robust in Q2 compared with the weak GDP outturn. The Composite PMI averaged 53.4 in Q2, indicative of growth of around +0.4%qoq. Our Euro area CAI suggested 1.5% annualised growth in Q2. This implies that some weather-related weakness weighed on GDP in Q2, although there still appears to be some discrepancy between GDP in Q2 and the business surveys.

How odd this constant moaning about the PMI divergence: perhaps one should inquire about conflicts of interest, manipulation and/or general survey validity over at Markit. One can dream.

The release of weaker than expected German and French GDP data, which also consequently saw French finance minister slash 2014 GDP forecast to 0.5% from 1.0%, together with mixed set of earnings, saw Bunds edge higher since the get-go. The upside traction by Bunds saw the yield on the benchmark EGB print below 1.00% for the first time in history. Lacklustre growth, together with the ECB announcing that professional forecasters have downgraded their view on Eurozone HICP for 2014 and 2015 underpinned the likelihood of further policy easing in the block, which in turn prompted further peripheral bond yield spread tightening. Also of note, Short-Sterling curve continued its bull flattening bias as market participants continued to re-price projected rate path following the QIR yesterday.

Cautious sentiment dominated the price action in Europe this morning as market participants digested somewhat mixed set of earnings (RWE -3.10%, K+S -3.65% and ThyssenKrupp +1.26%). As a result, the more defensive sectors such as health care outperformed, while financials lagged on the sector breakdown. On the other hand, the FTSE-100 index outperformed and is the only major equity index to trade in the green, supported by the bounce back following yesterday’s ex-div driven weakness and also by real-estate sub-sector names after Land Securities (+1.31%) was raised to buy from hold at Bank of America.

Turning to overnight market action and in general markets are trading with a stronger tone, with Asian advances coming on the back of a strong day yesterday for US and European markets. Asian Credit markets are broadly tighter whilst the Nikkei and ASX200 are up around +0.74% and +0.71% respectively although the Hang Seng and Shanghai Composite are both trading slightly down as we type. In related news, overnight South Korea’s central bank cut rates for the first time since May 2013 in an effort to spur growth. Asian credit is broadly tighter across the board with the Itraxx Asia 0.6bps tighter. In other overnight news Israel and Palestinian representatives agreed to extend the current truce for five days as they continue to search for a broader accord, although it seems to two sides immediately traded fire. The US also announced that a rescue mission to those in Iraq trapped on Mount Sinjar was less likely after special forces visited the area and found there were fewer people there than expected and they were in better condition than thought. Also overnight the Ukrainian government has announced that it will now allow Russian aid supplies to enter the country if a number of conditions are met, including that the Red Cross distributes the supplies and their own customs officials check them (more on this later). Also overnight we learned of the death of Brazilian presidential candidate Eduardo Campos whose plane crashed in bad weather.