Sentiment Better As German 'Confidence' Ignores Fundamentals, Tracks Stock Market, Rises
Remember all those European PMIs which imploded over the past month, destroying any hopes of a rapid rebound from Europe's technical recession? You can forget them now because the one indicator which tracks the level of the manipulated stock market more than anything else, German IFO business survey, just came better than expected, at a whopping 109.8 compared to expectations of 109.6 print, same as the previous one. And that is all it takes for futures, and the EURUSD to ramp, which in turn plants the seeds for another confidence ramp next month and so on. Here is Goldman's take: "The assessment of current conditions remained unchanged at 117.4, while expectations increase to a level of 102.7 after 102.4. Looking at the different sectors it shows that confidence in the manufacturing sector was broadly stable on a high level (14.0 after 14.3), while construction saw a small decline after a surge over the last couple of months (2.3 after 3.3; confidence stood at -13.2 in October). Confidence in the retail sector also recorded a strong gain (106.6 after 3.7), while wholesale saw a decline (12.8 after 15.0). This is a strong report with business conditions remaining significantly above their long-term average of 101.1. The rebound in business conditions after a soft spot during October to January is indicative for a rebound in the underlying momentum in the economy." Well, no, if anything it is indactive that Germans were happy to reap the benefits of a few trillion in liquidity which in turn pushed markets higher, and making Germans even more confident despite the big miss in German PMI in March. But for now a big drop in the market is unwelcome so let's focus on reflexive, Catch 22 indicators. Even Goldman is perplexed on the spin: "Only the release of the 'hard' data in the coming weeks will show which survey is giving the correct signal with respect to the underlying momentum of the German economy. But in any case, the March IFO argues against taking, at least for now, the PMIs at face value."
Charting the IFO:
And here is a recap of overnight sentiment from BofA:
The regional MSCI Asia Pacific Index slid 0.6%, marking the second day in a row the index finished lower, as concerns build that exporters will post weaker earnings results in the months ahead. In addition, investors are worried that Chinese banks have understated the risks of loans to local governments. Starting with the worst performers, the Indian Sensex dropped 1.8% while the Korean Kospi shed 0.4%. The Hang Seng finished flat while the Shanghai Composite and the Japanese Nikkei both managed to finish up 0.1%.
In Europe, equities are trading 0.3% higher in the aggregate. The region's blue chips are flat while shares listed in London are up 0.4%, German shares are inline with the broader regional aggregate up 0.3% and French listed firms are trading flat. At home, futures are pointing to a modestly higher opening later today. The S&P 500 is set to open up 0.2%.
In bondland, Treasuries are selling off across the curve with the 5, 10, and 30-year yields all 3bp higher. The 10-year yield is currently trading at 3bp to 2.26%. In Europe, yields on the safest European bonds are selling off while peripheral debt is rallying. The Italian 10-year yield is 5bp lower at 4.97% and the Spanish 10-year is 7bp lower at 5.26%.
In the currency markets, the dollar is strengthening against a basket of other major currencies. The DXY index is up 0.3%. That is helping push commodity prices lower. Gold is down $1.21 an ounce to $1,660.87 while WTI crude oil is 46 cents lower to $106.44.
Overseas data wrap-up
The German IFO survey was a touch stronger than expected in March, showing a slight overall pick-up over the month. Current conditions were unchanged at 117.4, though that was above market expectations of a decline to 117.0. But the Business Climate index rose from 109.6 to 109.8 (market 109.6): the 5 consecutive increase, to its highest since July last year. Similarly, expectations also picked up over the month - from 102.4 to 102.7 (market 102.6) - again the five consecutive monthly rise to the highest since July last year. While survey indicators (ie the PMIs) of the state of the German manufacturing industry are very mixed at present, all are consistent with German GDP expanding moderately in the first quarter.
Italian consumer confidence unexpectedly rose to 96.8 in March up from 94.4 in February. The market was looking for a decline in consumer confidence to 93.5. In our view, the improvement in the index is not the start of a new trend but rather signals that consumer confidence is stabilizing around the current level. With the economy set to slide further into recession this year, we think consumer confidence will likely stay at the current depressed level or even fall further.
The week's events
The data calendar will be relatively light. Wednesday's durable goods report will likely be significant. We are expecting orders to advance 4.0% on the back of a sharp increase in Boeing orders. Stripping out transportation, durable goods orders are expected to rise 2.0%. On the other hand, the policy calendar heats up as we hear from a bevy of Fed speakers, including the "core" of the FOMC: Chairman Bernanke and NY Fed President Dudley. We think there speeches may provide their latest views on the economic, inflation and policy outlooks.
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