German IFO Business Confidence Highest Since July, Sends EURUSD Briefly Over 1.33
The phenomenon of market and confidence reflexivity is quite well known to the US, where not one but two indices, the UMichigan and Conference Board, provide upward boosts to the market when the market is going up, which in turn boosts confidence even more, and so on in a closed loop well used by agents of the central planning bureaus, especially during economic slides, when the "economy" is nothing but the Russell 2000. Europe is no stranger to this, and early this morning despite Germany's recent economic data coming out nothing short of atrocious, Germany announced its business managers are quite confident, and more so than expected whatever that means, after the IFO Business Survey printed at 109.6 on expectations of 108.3 - the highest reading since July 2011. As a reminder, 9 days ago "The German Industrial Output Slides More Than Greek, Despite Favorable ZEW" - in other words, the propaganda machine is out in full force, desperate to break the linkage between Europe's recessionary economy, and the market which has soared over the past 4 months for one reason only - trillions in central bank liquidity. Alas, the bill has now come in in the form of record Brent in British pounds, fresh all time highs in energy prices, and WTI which if Goldman is right, will hit $120 this summer and send Obama's reelection chances down the toilet. Anyway, here is Goldman with a note on the German confidence index which briefly sent the EURUSD up 80 pips to a high of 1.3340, showing just how volatile the fulcrum security now is with 148K net shorts, since retracing most of the gains as apparently not even the market is that stupid to believe the confidence is more important than hard data following the EU's announcement that the Eurozone will officially see a GDP decline of -0.3% in 2012 vs previous expectations of +0.5% rise.
From Goldman Sachs
IFO Business Survey - Further improvement
The February Ifo business climate index rose further to a level of 109.6 after 108.3, its highest reading since July last year.
“Business conditions” rose to 117.5 after 116.3, while “business expectations” increased to 102.3 after 100.9.
This is a very solid report and in particular the fact that the assessment of “business conditions” has now also started to improve suggests that the German economy is, after a small decline of economic activity in Q4, back on an expansionary path. The further increase in expectations – the third consecutive increase – shows that German corporates do not think, at least on average, that the Euro debt crisis will be a major risk factor when it comes to their own business.
Looking at the different sectors it shows that the rise in confidence was spread across the economy with manufacturing, construction, whole sale and retailers all recording increases in February.
The fundamental drivers of this rising confidence are easy to identify: a pick-up in the global industrial cycle, coupled with very easy financial conditions for the corporate sector and no headwind from fiscal tightening all imply a solid starting position from which the economy can regain momentum.
Today’s Ifo also puts yesterday’s flash PMI into perspective. Monthly data are volatile and the rise in the Ifo suggests that some of the relative disappointment in the PMI should be discounted (though there is still a clear improvement in the PMIs when compared to Q4 last year).
So according to Goldman ignore the bad PMI data because businesses are more confident courtesy of a transitory bump in markets that has now awakened the inflation dragon which will now tear apart profit margins? Just brilliant.