Market Morsel: The Germans and our wool.

Market Morsel

Why did the German sheep say ‘guten tag’? Because it had woolkommen vibes!

At EP3, we often discuss the fact that markets are interlinked; the performance of our commodities is, in many ways, driven by what occurs in the wider economy. That is especially true for our high valued commodities, such as wool.

In the past, at EP3, we have examined the links between wool and copper, wool and Chinese bonds and wool and oil. In this article, let’s look to Europe, and specifically Germany.

The German Manufacturing Index is a measure of the activity of purchasing managers in the German manufacturing sector and surveys on topics such as new orders, production, inventory levels etc.

So why are we looking at it?

Well, the German economy is huge, and manufacturing is a crucial part of their economy. If this sector of the economy is doing well, then Germany and in turn, Europe is doing well.

So, we use the GMI as a lead indicator for the economy’s health; therefore, you can argue people’s spending ability.

The chart below shows the eastern market indicator (wool) and the GMI from 2007 to the present. We can see that they tend to follow quite a similar trend.

When the GMI declines, we tend to see similar patterns in wool, and vice versa when it rises. In recent months, we have seen a slide in the GMI, which doesn’t bode well for the economy.

If this flows through to spending power, then we could see a move away from wool. Wool is a high-valued, discretionary spend. People who are struggling financially are less likely to spend on new woollen garments.