Overnight Sentiment: 'Rumors Regurgitated, Refuted' Redux As German Economy Slips Again

The last time we saw a bevy of regurgitated European rumors shortly refuted was last Friday. Today we get a redux, following a hard push by none other than Spiegel (precisely as we predicted a month ago: "And now, time for Spiegel to cite "unnamed sources" that the EFSF is going to use 3-4x leverage") to imagine a world in which the ESM can be leveraged 4x to €2 trillion. This is merely a replay of last fall when Europe's deus ex for 2 months was clutching at a cobbled up superficial plan of 3-4x EFSF leverage, which ultimately proved futile. Why? Because, just like in 2011, one would need China in on this strategy as there is simply not enough endogenous leverage in either the US or Europe which would make this plan feasible. And China, we are sad to say, has a whole lot of its own problems to worry about right about now, than bailing out the shattered dream of a failed monetary unions still held by a few lifelong European bureaucrats, which this thing is all about. As expected, moments ago Germany refuted everything. Via Reuters: "Germany's finance ministry said on Monday that talk of the euro zone's permanent bailout fund being leveraged to 2 trillion euros via private sector involvement was not realistic, adding that any discussion of precise figures was "purely abstract." This also explains why we devoted precisely zero space to this latest leverage incarnation rumor yesterday: we were merely waiting for the refutation.

Elsewhere in real news, not rumors, not made up Greek deficit numbers, we got the German IFO for September, which dropped from 102.3 to 101.4, on expectations of a rise to 102.5. This was the fifth consecutive month of declines in a row, and indicates that despite the best wishes of the permabulls, Germany will sooner or later be dragged down into a recession. Ironically, the only thing that could prevent this is a plunge in the EURUSD to once again restart the German export machine which for the past 2 years has carried the entire Eurozone on its back. The paradox now that the political ECB is involved, is that a drop in the EURUSD is seen as indication of lack of faith in the Euro, which the ECB can not allow. Which is great news for the Fed: while the European central bank is doing all in its power to push the EUR higher and thus preserve the myth that Europe is viable, the Fed is crushing the dollar with every breath, in the process continuing to steal Europe's economic advantage.

From Goldman on the IFO:

The IFO survey declined further in September from 102.3 to 101.4, against an expectation of a small increase (Cons: 102.5). The decline occurred both in the assessment of 'current conditions' and in the 'expectations' component. This decline signals a further loss of momentum in the German economy, though there is no indication that growth in Germany is about to decline sharply. Indeed, the level of 'current conditions' remains above its long-term average.


1. The Ifo index saw its 'current assessment' component decline from 111.1 to 110.3, somewhat weaker than the consensus expectations (Cons: 111.0). The 'expectations' component also disappointed, easing from 94.2 to 93.2 (Cons: 95.0).


2. In terms of the different sectors, manufacturing and construction was broadly unchanged, while wholesale and retail trade saw the largest declines. The stable manufacturing component is in line with the Flash PMI for September.


3. Overall, German companies are worried about the medium-term outlook. These concerns are presumably related to the Euro crisis and the possibility of a worsening in the tensions in financial markets and the periphery. The recent actions of policy makers do not seem to have had a significant impact on German business confidence, so far at least.

For a recap of everything else, here's DB's Jim Reid:

Moving to overnight markets, equities and commodities are trading lower led by the Nikkei (--0.4%) and the Hang Seng (-0.3%). Chinese equities rallied off a multiyear low this morning on domestic media reports that the government is examining measures to bolster the equity markets. PBOC advisor, Song Guoqing, commented in the media over the weekend that the Chinese economy hasn’t shown any signs of rebounding in Q3 and that domestic investment is unlikely to expand in the short term. He also forecast that China’s slowdown may persist into 2013. China has also postponed a ceremony that marks the 40th anniversary of the resumption of diplomatic ties with Japan although weekend reports suggest that anti-Japan protests in China have been somewhat more subdued. The overnight risk-off tone is extending into commodities with spot gold (-0.63%), crude (-0.6%) and copper (-0.94%) all reversing last Friday’s gains. Just before we print, Japan’s Kyodo News is reporting that 3 Chinese surveillance ships entered into disputed waters near the Diaoyu/Senkaku islands in the East China Sea.

Recapping Friday’s move, news that Spain was considering freezing pension increases and a planned increase in the retirement age as part of economic reforms ahead of a potential request for aid helped the IBEX rally +2.60% on the day. Spanish bonds also outperformed (10yr yields -2bp) despite a weaker session for BTPs (10yr +6bp).

In other stories, Friday saw the troika announce that it would halt negotiations with the Greek government for a week, with EUR2bn of budget cuts yet to be agreed between the two parties, although talks were reportedly making “good progress” (Reuters). Ekathimerini noted that the troika’s report on Greece could be delayed until after the US elections, however this was dismissed as untrue by Greece’s finance ministry. If that wasn’t news enough, Der Spiegel reported on Sunday that Greece’s budget shortfall over the next two years will be as high as EUR20bn, although this was rejected by the Greek finance ministry who said that the current package of EUR11.5bn in budget savings and EUR2bn in additional tax measures would be sufficient to meet budget targets. French Prime Minister Jean-Marc Ayrault backed proposals for a 2-year extension to Greece’s austerity program (FT). Meanwhile, German government spokesman Kotthaus and Schauble both declined to comment on headlines that creditors may be considering notional haircuts on Greek debt. We may get more Greek headlines as the week progresses.

Away from Greece it’s worth noting that the 2013 French Budget will include an additional fiscal tightening of EU30bn, two-thirds of which will be tax-based. As our European economists highlighted, this is due to lower growth forecasts for next year (although official forecasts might still be too optimistic) and they argue that a further EU10bn is required to meet the 3% deficit target for 2013. Interestingly recent opinion polls have indicated a slip in Hollande’s popularity ratings to as low as 44% (Reuters). The focus on fiscal tightening seems to have disappointed some voters but as we’ve seen many times throughout this crisis balancing austerity versus growth is easier said than done.

In terms of the rest of the week in Europe, Draghi will make a keynote address at a German industry event on Tuesday. On the same day, Schauble will meet with his Finnish and Dutch counterparts. Wednesday will see Greece’s two largest labour unions go on a general strike against budget cuts. We have a Spanish bills auction tomorrow and Italian debt auctions throughout the week. The U.S. Treasury is also scheduled to sell $99bn of 2-, 5- and 7-year notes this week. In other events, the IMF’s Christine Lagarde will speak on the world economy in Washington today. There will also be a number of Fed speakers.

On the data front, we have the IFO survey today, CPI (Wednesday) and unemployment (Thursday) data from Germany. Eurozone consumer confidence (Thursday) and CPI (Friday) are also notable European releases this week. In the US, we will get the Dallas Fed Manufacturing survey today followed by the Richmond Fed survey and Case-Shiller home prices tomorrow. US new home sales is out on Wednesday followed by durable goods orders, revised Q2 GDP and pending home sales on Thursday. Friday’s personal income and spending data for August will also be important. In Asia, Japanese CPI, industrial production, unemployment and retail trade for the month of August are all due on Friday. It should be relatively quiet in China with the government’s corporate industrial profits for August being the main data print.


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