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Research Edge Position: Long Germany (EWG)


The Federal Statistics Office reported that German Producer Prices fell 7.8% in July from a year earlier. As we’ve been highlighting in our posts on Germany  over the last weeks, we see this deflationary environment in the short term as positive (it remains our conviction that in the last quarter inflationary pressure will return to the major economies) as the economy melts up, having moved into positive territory with a +0.3% in Q2 GDP reading quarter-on-quarter.

On an annual compare this “deflationary” PPI number (the lowest in 60 years) can be heavily attributed to the manic energy prices of last year, while on a sequential basis, PPI fell 1.5% or -0.2% when excluding energy costs. According to the report, energy prices fell 16.5% annually, with gasoline decreasing 5.1% on the previous month.  After June’s PPI reading of -4.6% Y/Y, July’s number does not sway our opinion that producers will benefit on price declines which, if sustained, should continue to trickle down to consumers. German CPI last registered  at -0.7% annually (the Eurozone average), and we see this purchasing power as bullish for consumer sentiment and spending.

While a strong Euro has also benefitted domestic purchasing power, we’re still cautious on the export picture with the Euro above the $1.42 level. However with exports and factory orders increasing sequentially, ZEW’s economic expectations number jumping upward, and continued strong and transparent leadership from Chancellor Merkel and Co., our bullish stance on Germany is intact.

Matthew Hedrick

Germany: A Huge Deflationary Print?  - MH ppi