Soft German ZEW Weighs on DAX Capping the Upside for European Equities

European stock markets are higher on Tuesday, but have had difficulty gaining traction as weak German sentiment weighed on the DAX. European yields are moving higher, led by Gilts, after stronger than expected inflation data and as the FTSE 100 moved higher. The unexpected jump in U.K. CPI added to pressure on Gilts, while a slightly weaker than anticipated German ZEW reading supported Bund outperformance, especially as the DAX also struggled as the EUR advanced against dollar and pound. Today’s data round hasn’t changed the outlook for ECB and BoE decisions this week, with both central banks seen on hold and the event risk for the ECB still a slightly more hawkish tone from Draghi than markets are looking for.

German political wrangling didn’t have significant impact

While it is tempting to put down the dip in ZEW investor confidence to the political uncertainty and the failure of the first round of coalition talks survey compiler ZEW, which did a separate survey on the political situation in Germany, said this didn’t have much of an impact on economic expectations, but found that investors did expect an impact on the future of Brexit talks and upcoming EU reforms.

German ZEW investor confidence fell back to 17.4 in December, from 18.7 in the previous month. The decline was more than anticipated, and effectively reversed the improvements of the last two months, leaving the headline number at the lowest reading since September. The current conditions indicator still improved as did the three months trend rate and at 17.4 the ZEW still suggests that optimists far outnumber pessimists. Still it is below the long-term average and after the weak production numbers from September/October, some jitters also in the forward looking indicators now casting some shadow over the still very strong German and Eurozone growth outlooks that will reduce the pressure on Draghi to finally commit to an end date for QE.

UK inflation data came in hotter than expected, with headline CPI rising to 3.1% year over year, its highest rate since March 2012. The median forecast had been for 3.0%, matching the rate seen in October and September. Core CPI, however, came in as expected, at 2.7%, the same as in October. PPI input data rose to a rate of 7.3% year over year, up from 4.6% in the month prior and above the median forecast for 6.7% year over year. PPI output data lifted to 3.0% year over year from 2.8%. Overall, the data paint a picture of slightly warmer than expected price rises, though still within BoE projections.