The increase in the volume of commentary from Germany as to how uncomfortable they are becoming to ECB’s monetary policy stance is certainly more noticeable – Germany is clearly against further ECB stimulus. Chancellor Merkel and some of her policy makers are feeling uneasy about the high level of liquidity, the "long" period of low interest rates and what impact this is having on the various asset classes.
However, the difference this time is that the ECB policy makers are willing to go it alone – willing to take action without German political support. The ECB is looking to provide further added stimulus that is supported by the zone’s majority but being resisted politically by Germany. A direct German/ECB spat is not what the single currency needs right now. The resistance from Europe’s economic backbone makes it more difficult for "risk transfer" to occur smoothly within the eurozone. There is only so much push back from either part before it begins to erode market confidence. Both parties walk a fine line in the EUR’s market existence and we have not even mentioned the "banking union" debates!
The 17-member single currency is proving somewhat resilient to dovish commentary of late and this despite market sentiment becoming overall more "big-dollar" bullish after the recent sharp rise in U.S. bond yields and USD/JPY breaking through the 100- barrier. Even mixed euro data is proving to be of little hindrance to the multi-country supported currency. Investors this morning have been throwing their short-term support behind the single currency preferring to follow demand appetite for the order book of Spain’s 10-year bond issue (demand supposedly exceeding €14-billion vs. an expected €4-5-billion) rather than the disappointing German ZEW headline or its offset, the better than expected eurozone industrial output numbers.
The bar for good news seems to be set relatively low these days. The German ZEW index came in largely unchanged from last month’s reading of 36.3 with a print this month of 36.4. The market expectations were a tad higher, looking for 38.3. The headline again shows that German confidence remains off its highs but not “yet in full reverse” – the euro/German divergence continues to exist. For the time being the German investor should expect the strong performing global equity market to support ‘confidence’ at current levels at least. In contrast to the German confidence report, the eurozone industrial production surged in March (+1%), offering hope that the region’s economy has emerged from recession in Q1 (data out tomorrow may support this thought). Results indicate that industrial production rose +0.3% during the quarter, rebounding from a decline of -2.1% in Q4, 2012. The concern is that amongst the major euro economies, only Germany showed real strength, rising +1.7% m/m. Betting on a “one horse race” never became popular for obvious reasons!
Perception is a key ingredient for market confidence and so too is timing. Political Europe is not immune to these attributes; they continue to battle the elements to pave a smoother path for the EUR’s survival. The possibility of losing market confidence would kill the euro project "dead in the water." It was important yesterday that the euro-group approved the release of Greece’s next two bailout installments, totaling €7.5-billion. However, the country was told that it would have to complete certain structural reforms before the second tranche is released next month. The eurozone finance ministers agreed that Greece should receive €4.2-billion later this week – the second tranche would be disbursed once Greece has met the troika's “milestones.”
Unlike Europe, North America continues to dance to its own tune. Helicopter Ben will be relieved that the U.S. consumer is alive and kicking or so the story goes. Yesterday’s U.S. Retail sales headline has thrown the cat amongst the pigeons and has analysts now scrambling to revise their Q2 GDP expectations – growth is now tipped to expand at an annualized clip of +1.5% instead of the initial expectation of +1.2%. Even the Q1 print could possibly be revised higher to +2.8% from +2.5%. However, despite wearing the “rose colored glasses” some questions need to be considered and perhaps answered. In real terms does the bright U.S. near-term growth prospects outweigh the long-term demographic trend? What about the public and private sector balance sheet repair? For now, the market seems happy to buy into a U.S. growth story with traction.
Earlier this morning the EUR was initially very stable, hovering around the 1.3000, underpinned by Middle East demand, while speculative accounts hovered on top looking for a potential breakout to profit. This morning’s weak German ZEW was countered by the survey assumption of no further ECB rate cuts. Throw into the mix a stronger eurozone industrial output print and the market had a single currency bent on testing new short-term highs just shy of 1.3030. However with the AUD being slammed on wider budget deficit news has managed to lead the fickle 17-member single currency much lower heading into the North American session. For many, the EUR’s 1.2950 level remains a key bear indicator.