German bunds tad lower after industrial production improves in December; focus remains on trade balance

The German bunds traded tad lower Wednesday after the country’s industrial production improved during the month of December. However, investors wait to watch the country’s 10-year auction, scheduled to be held on February 7 by 10:40GMT and the trade balance for the month of December, due on the following day at 07:00GMT.

The German 10-year bond yields, which move inversely to its price, rose nearly 1/2 basis point to 0.69 percent, the yield on 30-year note also remained tad higher at 1.34 percent and the yield on short-term 2-year traded flat at -0.57 percent by 09:05GMT.

After yesterday’s strong factory orders numbers and impressive headline wage settlement from the major metal-workers’ union IG Metall – a 4.3 percent wage raise from April together with other payments spread over 27 months, which we view as a step in the right direction but by no means a game-changer for the euro area inflation outlook – attention remained on the German industrial sector this morning with the latest IP data. Broadly in line with manufacturing turnover data, and despite very strong business sentiment surveys, overall production declined 0.6 percent m/m in December.

Within the details, manufacturing output followed a similar pattern, falling in the latest month by 0.7 percent m/m, but still posting an increase of 1.0 percent q/q in Q4, likewise the slowest quarterly pace since the end of 2016. Indeed, it is worth remembering that German manufacturing output had already risen very rapidly in the previous three quarters, and so the level of production in the sector in December was still 6.7 percent higher compared to a year earlier. 

The construction sector was a surprising weak spot in today’s figures, with output falling by 1.7 percent m/m in December and by 1.0 percent q/q in Q4. Of course, the adverse weather might have played a role and we expect to see a rebound at the start of this year, particularly given the strong fundamentals and elevated confidence in the sector. And the strong orders data and upbeat business surveys similarly suggest that German manufacturers will once again enjoy the fruits of firm domestic demand momentum and much-improved conditions in the euro area and other overseas markets in Q1.

Meanwhile, the German DAX rose 0.28 percent to 12,433.00 by 09:10 GMT, while at 09:00GMT, the FxWirePro's Hourly Euro Strength Index remained slightly bearish at -77.41 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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