Eurostat confirmed that EMU industrial output fell for a second consecutive month in July. The 0.8% decline was larger than expected and is the third decline of such a magnitude in four months and weighed on the euro. German and Spanish industrial output had surprised on the downside last week, and Italy matched suit today with a report showing a 1.8% contraction, much larger than expected, and bringing the year-over-year rate to -1.3% (workday adjusted). It is the largest decline since January 2015.  

We had anticipated that the ECB staff would shave its growth forecasts, which are announced tomorrow. In June, the staff forecast 2.1% growth this year slipping to 1.7% next year. France took the jump on the ECB by revising its growth down to 1.7% this year and next from 2.0% and 1.9% respectively. The poor economic data and softer forecasts come at a difficult time for Europe as next year’s budgets are prepared.  

Slower growth translates into larger deficit as a percent of GDP. France revised its deficit projection to 2.6% this year from 2.3% and next year 2.8% of GDP rather than 2.4%. Although the Italian government has been making more investor-friendly comments, which have been rewarded by bond market investors, the room to maneuver is limited. Moreover, the decline in the sovereign yield and premium over Germany may be having a diminishing impact on bank shares, which are off 1.4% at pixel time while the benchmark yield is about two basis points lower.  

The euro has chopped between $1.1570 and almost $1.1610, staying within yesterday’s ranges. Sterling also remains within yesterday’s range.  While a date in November for a special UK-EU summit to sign an agreement is bandied about, the other side of the problem, the cabinet, and Parliament are digging in for a fight. There is talk of a leadership challenge. The Bank of England meets tomorrow, and a unanimous decision on rates is widely expected after last month’s hike. The market does not anticipate another rate hike until after Brexit at the end of March 2019.