Marginal fundamental improvement leaves us cautiously optimistic
Exports rose 0.7% in March on a monthly basis from February, the first positive month-over-month change since last September, according to data released by the Federal Statistics Office today. The delta here is critical to note. We could only focus on the annual percentage change in exports (see chart below), yet we're of the camp that the incremental improvement of fundamental data points on a sequential basis is confirming that Germany's recession is waning. Is Germany out of the dark? Certainly it is NOT, however we're bullish that the country's recovery will come sooner and outperform many of its Western European peers, especially if it can get its strong side, exports, moving.
Additional data points that have come in this week show a mixed fundamental picture:
- Industrial Production held steady from February's contraction of 3.4% on a monthly basis or fell 20.4% on an annual basis
- Manufacturing Orders increased 3.3% in March on a M/M basis
- Retail Sales (excluding autos) fell 1.0% in March M/M
- Trade Surplus increased to 11.3B EUR in March from 8.6B EUR in the previous month
Not included in retail sales is the success of Germany's auto rebate program. According to the VDIK Association of International Motor Vehicle Manufacturers new car registration in Germany was up over 30% in April year-over-year, and anecdotally the program has been a huge success. The program incentivizes individuals to trade in their old cars (9 years+) and receive 2,500 Euros towards a new car that meets certain emission standards. As we discussed in a post on 4/24, "Germany's Lifeblood Das Auto", the automobile industry has remained relatively resilient despite severe global demand destruction. But the numbers don't lie. BMW beat Q1 expectations, yet still recorded a net loss of 55M EUR before taxes and depreciation and Daimler reported that revenue fell by 25%, adjusted for exchange-rate effects. GM's German Opel division still hangs in the balance as it looks for a buyer. Increasingly Italy's Fiat looks like a strong candidate.
While the ECB trimmed the interest rate 25bps to 1% yesterday, the cut was largely baked in. We've been harping on the ECB's lethargic call to action to cut for the better part of this year. Yesterday helped to confirm that ECB monetary policy can only go so far, especially as it runs out of room to cut. We've highlighted the positive fiscal stimulus measures issued by countries like Sweden. Additionally we believe that Norway will roar higher due to its leverage to the price of oil. We're oil bulls on a TREND (3 month or more) duration.
The ECB decision yesterday to pump some 60B EUR in the Eurozone economy through its purchase of euro-denominated covered bonds will help put wind in Europe's sails. Importantly for Germany and Chancellor Angela Merkel, who is fighting for reelection in September, there will be a focus on offsetting the negative sentiment associated with a burgeoning unemployment rate, which currently stands at 8.3%, and getting domestic deals done, like an owner for Opel. Importantly, German confidence indices (ZEW and IFO) have improved in April. Confidence, according to a distinguished Yale professor of European Union Studies that we recently had the pleasure to meet with in our office, is a measure not to be overlooked.
As always, price rules. With the appropriate entry point we'll be considering the etf EWG on the long side.
Matthew Hedrick
Analyst
