Germany’s Marginal Turn

Positions in Europe: Long British Pound (FXB); Short Spain (EWP)


Not unlike numerous global economies we’re following, the prospect of inflation rising spells growth slowing - here Germany is no exception to the rule. Today’s economic sentiment survey from ZEW that attempts to predict the economic climate six months out registered 7.6 in April versus expectations of 11.3 and 14.1 in March (see chart below). The significant drop follows two previous months of slowing, and we contend is a reflection of the mean reversion trade Germany must transition through after at least a year and a half of white-hot fundamentals.  Despite the marginal change, we remain bullish on Germany from an intermediate term perspective.


Germany’s Marginal Turn - ME1


                        --------Here’s Additional German Data That Looks Less Good On The Margin--------


CPI rose to 2.3% in March Y/Y versus 2.2% in February


Manufacturing PMI slowed to 60.9 in March vs 62.7 in February


Services PMI data appears “toppy” at 60.1 in March vs 58.6 in February, and is bumping up against the heavy and historically significant 60 resistant line. We’re calling for the April number to roll over



                                 --------While Positive German Fundamentals Remain Glaring---------


Unemployment Rate  7.1% MAR vs 7.3% FEB

                -The unemployment change for March was -55K MAR to 3.01 Million (the lowest level since June 1992), beating expectations of -25K


Factory Orders  20.1% FEB Y/Y vs 16.5% JAN

                                    2.4% FEB M/M vs 3.1% JAN


Industrial Production    14.8% FEB Y/Y vs 12.7% JAN

                                                2.4% FEB M/M vs 3.1% JAN


Exports  2.7% FEB M/M vs -1.0% JAN


Imports  3.7% FEB M/M vs 2.3% JAN


Trade Balance  €12.1B FEB vs €10.1B JAN



We are not currently invested in Germany in the Hedgeye Virtual Portfolio as we’re cautious that the DAX is trading just above its TREND line, an important inflection level in our models.  We see a similar set-up with the UK’s FTSE (see chart below).  However, at the right price we like Germany and Europe’s other fiscally sober nations like Sweden and the Netherlands.


Germany’s Marginal Turn - ME2


Overall, German fundamentals and business trends continue to look positive. Exports are expanding, employment has improved, and factory orders and business confidence have come in strong over recent months. Yet, rising inflation is a risk to consider, as is mean reversion from some of the white-hot data. Over the intermediate term, we continue to believe that Germany will be the region’s growth engine (GDP is expected to grow 2.5% this year) and think Germany may also be a defensive play as the region remains mired in sovereign debt contagion. 


We expect that EUR-USD to make gains given the ECB’s hawkish stance on inflation and recent 25bps interest rate hike, especially as US policy continues to debauch the greenback.


Matthew Hedrick


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