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A combination of misplaced optimism toward European GDP figures and the rise in US retail sales has the risk trade in better shape so far today. The USD was selling off against most major crosses until the release of the US data.
European equities are up by around a half a percentage point across most of the major benchmarks, and Dow futures are pointing toward a mild rise at the market open. Treasuries are holding firm with an unchanged curve overnight. Other safe havens are also little changed with Canada 10s flat, the yield on German 10s up a basis point or two, and gilts also flat. Italian and Spanish 10s are both down in yield by around 5bps. Commodity markets are generally in the black in the black at mid day but most of the moves are pretty small outside of gains in agricultural commodities. Overall, we’re left with a picture whereby equities and FX are buying into the improved market tone a little more convincingly than bonds and commodities, and I think the latter two broad markets are closer to getting it right.
The reality is that the broad eurozone economy and the GDP of its main anchor economies like Germany and France stalled out as the region remains in a growth recession.
Europe’s growth outlook is weak, inflation is falling and confidence is fragile ‐ not typically the recipe for strong currency appreciation. Today’s releases included: Eurozone GDP, which came in as expected, falling ‐0.2%q/q and ‐0.4%y/y; while both German and French GDP came in higher than consensus they were both lower than Q1 at 0.3%q/q and 0.0%q/q, respectively. French inflation was slightly softer than expected, while German ZEW (business confidence) unexpectedly dropped to ‐25.5.
France's economy is in poor shape but the headline print is weaker than the details. France has posted zero growth for each of the past two quarters in the wake of a nearly equally moribund back half of 2011 that had 2011Q4 growth at 0.3% q/q (just over 1% annualized) and zero growth in 2011Q3. Germany's economy is in slightly better shape, but not vastly so as growth since 2011Q3 has come in at 0.4%, -0.1%, +0.5%, and 0.3% all at non-annualized rates.
Market mood was mellow after a better than expected German growth numbers. The day was jam packed with crucial economic releases from the U.S with retail sales, which showed an increase from the previous month’s decline largely driven by a lower oil prices. With inflation being the talking point off-late with severe drought in the U.S, the producer price index also surprised markets printing much better than forecast. The housing numbers later in the week could show further consolidation for a sector which remained in the doldrums since recession in 2009 and hindered economic recovery for the world’s largest economy since that period. With crisis in Europe showing no signs of backing, market watchers would be keenly following bond auctions in Italy and Spain in coming days to take a stance on the situation in Europe.
With Europe’s economies languishing amid false cries of unfair austerity from France, it’s perhaps no big surprise that German investors are shaking their heads at the world. German investor confidence as reflected in the August ZEW survey fell sharply on the key forward looking expectations gauge.
The bottom line, with no growth, no production and falling confidence, how will the eurozone get out of its situation, simply moving debt from balance sheets to the ECB just doesn't cut it.