Morning Brief – German bottom?

Morning Brief – German bottom?

Tue 26 Nov 2019

German bottom?


Germany narrowly avoided recession thanks to data last week that showed third quarter growth at 0.1%. Congratulations are in order then; the driver of Eurozone growth and manufacturing export champion is back up and running! Hold on, perhaps we should wait a moment before putting the Riesling on ice. 


If you walked through a dodgy area, one where you’d be fairly relieved not to have been mugged, I think you’d agree that avoiding tragedy on one occasion is unlikely to do wonders for your perception of the neighbourhood in general. Perhaps you all might forgive and forget faster than I, but I’m certain I’d enter the area with similar trepidation as I did the first time. I certainly wouldn’t leave my money lying around there! I concede the metaphor for Germany is wearing thin here, fiscally it’s still a remarkable haven, however, the principle stands: momentary relief from arbitrary observations shouldn’t remove the cloud of doubt from above Germany and the Eurozone just yet.   


The Ifo Institute produces a survey each month on German business confidence. The release is closely monitored by markets as, by definition, we receive three times as many of these soft data releases as we do quarterly GDP and, therefore, it is seen as more timely and reactive when forecasting economic output. Yesterday saw the release of this data and it posted a rise for the third consecutive quarter. Add this to broader survey data such as the Purchasing Manager’s Index released last week and a case is building to suggest that short run sentiment is warming. Perhaps we might even conclude that pessimism surrounding German output and manufacturing is dissipating and being replaced by observations of resilience despite an enduring US-China trade war. 


The market evidence of lifting doubt is exemplified in Germany’s bond market and the yield on its benchmark 10-year note. Since falling to a record low of minus 0.72% while recession confirmation loomed, the asset has recovered to around minus 0.3% – still deep in negative territory but at least staging a recovery towards free, though not subsidised in nominal terms, money at 0%. In contrast, evidence of market sensibility comes from the foreign exchange market (obviously!). The Euro-Dollar exchange rate has failed to appreciate meaningfully since the miniscule Q3 growth was confirmed showing market uncertainty regarding Germany. Confirmation of this scepticism around the Euro is confirmed by CFTC data on Friday showing US Dollar net long positions (those that demonstrate investors’ anticipation of a strengthening Dollar) hitting 5-week highs.


Analysts and institutions claiming bold recoveries in Germany (NatWest among others) might therefore be underwhelmed by German performance in the months to come. Headlines this morning attest to progress on a Phase 1 Trade Deal according to the Ministry of Commerce’s statement regarding a phone call early on in Beijing this morning. However, we’ve been shown glimmers of global trade resolve before, all of which have later faded. With Christmas day less than a month away, learn this lesson now: whilst being early is a virtue, under-baking an idea can be dangerous. The German economy must thaw first before we can be convinced of a meaningful recovery. If we carve into the Turkey now I’m afraid we’ll find it worryingly pink. 





Discussion and Analysis by Charles Porter

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