“Shoots” in Europe?

The July Purchasing Managers’ Index was released by Markit Economics today for the Eurozone, Germany, and France. While we believe that making an absolute call on Europe would be shortsighted due to the uncorrelated returns across the region based on unique underlying fundamentals, today’s report provides a useful metric for comparing the two largest individual EU economys’ performance on a relative basis.

According to the composite PMI index, Eurozone aggregate manufacturing and service industries rose to 46.8 in July from 44.6 in the previous month.

For Germany, the largest economy in the Europe, PMI improved on a monthly basis. The Manufacturing index rose to 45.2 from 40.9 in June and Services index rose to 48.4 from 45.2, just short of the 50 level that divides contraction from expansion. France’s PMI for manufacturing advanced to 47.9 from 45.9 while services declined to 45.5 from 47.2.

The Ifo Institute also reported today that the German business climate index for July rose to 87.3 from 85.9 in the previous month, exceeding an expected gain to 86.5, and notching a four straight months of improvement.

For Germany, a country that has been on a short list of Eurozone countries we’re bullish on, today’s PMI and business confidence numbers indicate a step in the right direction. From a fundamental set-up we’ve been positive on Chancellor Merkel’s leadership; she has balanced a stimulus package (85 Billion EUR) with timely incentives such as the cash-for-trash auto rebate. These initiatives now appear to be  supporting modest growth recovery, which we see making steady improvement into 2H ’09.   

Germany’s powerful manufacturing capacity remains a primary structural advantage, with recent positive (but lagging) production signals that show sequential improvement on a monthly and annual basis, as well as Factory Orders that were up 4.4% in May over April levels. While the internal demand picture appears to be improving with the low CPI/low interest rate environment bolstering consumer spending, exports have shown a faint sign of improvement at 0.3% in May M/M. Because exports make up nearly half of German GDP, they could remain a stumbling block for growth if we don’t see measureable improvement in Q3 with production trends reversing in the absence of external demand.  For now though, the positive catalysts appear to be gaining on the negative, making Germany the most attractive of the primary EU economies on a relative basis.  

As we continue to monitor the European patient we’ll be looking to pair off our short position in Italy (EWI). Germany was down today along with most Western European indices, capping 9 days straight of gains or a 12.9% move for the DAX since 7/10.  Stay tuned as we look to buy the German etf EWG on pullback.

Matthew Hedrick

Analyst

“Shoots” in Europe? - GermanPMI


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