Recovery in the auto industry drives a 4.4% rebound in German factory orders in September; expectations of an ECB rate hike in December strengthen further.

German factory orders rebounded to some extent, driven by a recovery in the auto industry, indicating that Europe's largest economy is still showing resilience amid a turbulent global macroeconomic environment. Demand for factory orders rose 4.4% month on month in September, compared with a decline in the previous month that was the largest since January. However, the September orders data was slightly below the 4.5% growth economists had consensus forecast. The German economy grew 0.2% in the third quarter, faster than expected, and the Bundesbank expects growth momentum to strengthen "significantly" thereafter. Public spending has been playing a key role, but it has also caused volatility in monthly data. September orders were boosted by a rebound in the auto industry and stronger demand for machinery. Excluding large factory orders, the overall month-on-month increase was 5.1%. For the third quarter as a whole, orders rose only 0.2%. The rebound in orders offers a positive signal for the subsequent outlook for industrial production. However, for the September industrial production data still to be released, economists expect output may edge lower after strong growth in August. Overall, the report sent a positive signal for industrial production. Economists had been nearly unanimous in expecting that, after strong growth in August, September industrial production data might decline slightly. Business confidence also picked up, making analysts more optimistic that economic growth, expected at 1% this year, will accelerate further in 2027. Still, investors have reason to remain sufficiently cautious. Automakers are struggling with high costs and competition from China. Schaeffler, a major global automotive and industrial supplier, said this week that it plans to close five plants in Europe, four of them in Germany, and cut nearly 3,500 jobs, adding to the thousands of layoffs already announced across the industry. During a visit to Asia last week, German Chancellor Friedrich Merz advocated stronger ties between Asia and the EU, as both face pressure from China. Merz has taken an increasingly tough stance on trade with China and recently reached a consensus with French President Emmanuel Macron, paving the way for the EU to adopt stronger trade tools. The most positive signal in the German factory orders report is that the increase still reached 5.1% after excluding large orders, indicating that the rebound has a certain breadth; however, growth of only 0.2% for the third quarter as a whole still mainly reflects a repair after the previous decline. Public spending can supplement demand, but it cannot directly eliminate the cost disadvantages and competitive pressure facing Germany's auto industry. German factory orders rebounded 4.4% month on month in September, with demand for autos and machinery recovering, and combined with 0.2% economic growth in the third quarter, this shows that Europe's largest economy still has recovery resilience. But quarterly orders grew only 0.2%, and plant closures and layoffs in the auto industry are continuing, which is enough to show that fiscal support and industry structural adjustment are occurring at the same time. What the market is pricing is whether this industrial repair can withstand the squeeze from energy costs and rising interest rates. Only when orders are converted into deliveries, capacity utilization rises, and this drives margin improvement can a more solid foundation for industrial stock gains be formed. At the same time, growth resilience eases the European Central Bank's concerns about a downturn, while rising inflation constrains room for easing, so improved industrial earnings and pressure on bond yields can appear at the same time, and European assets may not necessarily see synchronized gains. The inflation trajectory across Europe shows clear divergence: Germany's October harmonized index of consumer prices (HICP) rose 2.8% year on year, down from 3.3%, while core inflation fell to 2.3% from 2.5%; eurozone headline inflation, however, rose further to 4.0% in October from 3.2% in August and 3.8% in September, with energy prices up 20.8% year on year, services inflation rising to 3.3%, and core inflation holding at 2.5%. The cooling of German prices is not yet enough to change the inflation pressure facing the eurozone as a whole. Commerzbank economist Ralph Solveen noted that a temporary fuel tax cut drove German inflation lower, but this trend is unlikely to last and inflation may soon rise again. The European Central Bank kept its deposit facility rate unchanged at 2.50% on October 29; as of November 4, another rate hike in December had become the market's mainstream expectation, with financial markets pricing in two to three hikes over the next year. The pricing logic behind the market's expected path for ECB policy is that the longer the energy shock persists, the greater the likelihood that companies will pass costs through to goods and services, thereby affecting wages and inflation expectations.