German factory orders collapse as markets wait for BoC rate decision

• European concerns grow as German factory orders slow
• Bank of Canada rate decision due
• Energy prices a key concern for traders

European markets are in the red in early trade today, with concerns around rising inflationary pressures and the potential impending economic squeeze hurting sentiment. This morning has seen German factory orders collapse into a three-year low, falling by 11.7% in July alone. That represents the worst month for German manufacturing demand since the height of Covid back in mid-2020.  However, it is worthwhile taking a step back, with that monthly figure coming in part due to a comparison against a particularly strong June that saw very large air and spacecraft orders. Thus, a three-month look does help to allay initial fears, highlighting a 3.1% rise in May-July compared with the prior three-month period. Nonetheless, today’s shockingly low German factory orders figure does little to help sentiment in the wake of yesterday’s PMI declines. For markets, there is a difficulty knowing whether to treat economic weakness as a cause for concern or a reason for optimism gives potential implications for inflation and monetary policy.

Looking ahead, the Bank of Canada rate decision look to take centre stage, with the bank expected to halt its tightening process once again. With the June growth figure falling into negative territory (-0.2%), and manufacturing falling further into contraction, there is a pressure on the BoC to take its foot off the gas for now. Nonetheless, their decision is unlikely to be an easy one, with July seeing inflation rise to 3.3% thanks to a surprising 0.6% monthly rise in consumer prices.

The Canadian dollar looks set to remain a key currency for traders given the notable shifts in energy markets, with output cuts from the likes of Saudi Arabia and Russia serving to drive WTI into the highest level since November 2022. We are seeing growth concerns temper those gains somewhat today, but there is undoubtedly a growing concern that another surge in energy prices could set the battle against inflation back to square one.