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Western European indices bounced back mildly today after a substantial sell-off on Monday following the World Bank's downward revision on global growth.  The report reduced the Eurozone's economic outlook for this year to -4.7% from a March prediction of -2.7%.

Mixed signs of economic stability throughout Europe continue, yet recent sentiment data from Germany and France yield an improved picture for forward-looking conditions.  German consumer confidence rose in July for a second month according to a Gfk survey released today. The index rose to 2.9 from a revised 2.6 in June; the uptick comes on the heels of yesterday's report from the IFO that showed German business and investor sentiment improved for a third straight month in June. Business confidence also rose in neighboring France for the third straight month in June, according to the Paris-based statistics office Insee. Yet in contrast to the bullish survey a separate report indicated that French household spending unexpectedly fell 0.2% in May on a monthly basis or -1.6% from the previous year.

As Eurozone's two largest economies, the health of Germany and France will greatly drive the improvement throughout the continent as European countries are highly dependent on the EU as a trading partner.  The Eurozone Purchasing Managers Index out today shows signs of stabilization, yet the numbers are still at a low level (a reading below 50 indicates contraction).  Services PMI declined to 44.5 in June from 44.8 in May, short of economists' expectations of 45.8 and Manufacturing (PMI) rose to 42.4 from 40.7 in May, its highest level since September 2008.

We continue to view Europe's health on an individual country level. CPI for France stood at -0.3% in May on an annual basis, while Germany's came in at the Eurozone average of 0.0%, according to Eurostat. These levels should benefit consumers and increase sentiment, however today's French Services PMI would suggest the opposite as the reading fell to 47.5 from 48.3 in May. We'll be monitoring German unemployment, which actually came in 10 bps to 8.2% on the last reading, to rise sequentially, which we believe should dampen sentiment. We expect modest but improving negative GDP growth in 2H '09 for France and Germany and modest positive growth in 1H '10.

Matthew Hedrick
Analyst