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We have had a bullish bias on Germany for most of the year. Today the ZEW Center for European Economic Research released its sentiment reports for September, and as we’ve seen over the last months (see chart below), this month’s reading shows an improving trend in the outlook  for Europe’s largest economy.  Its index of investor and analyst expectations, which aims to predict 6 months ahead, rose to 57.7 from 56.1 in August and current conditions rose to -74 from -77.2.  While future expectations came in under a forecast of 60, we believe the improvement rhymes with slow and steady growth for the remainder of the year and into 2010. Additionally, two economic institutes raised their forecast on the German economy today. The Halle-based IWH Institute said the economy will expand 0.9% in 2010 after predicting in March that it would shrink 0.2%, while the Essen-based RWI institute raised its forecast to 1.2% from a previous estimate of +0.2%.

Confidence and Clunkers Working in German Favor - a6

Secondly, the European Automobile Manufacturers’ Association said today that European car registrations, a measure of sales, rose 3% in August from the previous year, a gain on the previous month’s +2.8% reading. The data suggests that sales rose for countries that issued auto rebate programs (see table below). Germany led the charge at +28.4% annually in August, followed by gains in Italy (+8.5%), France (+7%), UK (+6%). To better quantify Germany’s August sales figure it’s worth noting that the German government set aside some $7 Billion for its program (Abwrackpraemie) that expired earlier this month, more than double the $3Billion the US allocated. Further the data clearly shows the lack of demand in Eastern Europe, a region that has been severely crippled under a cocktail of Western financial leverage and depressed demand from the Eurozone, its largest trading partner.

Confidence and Clunkers Working in German Favor - a3

Europe’s largest automobile manufacturer Volkswagen reported today a growth of 9.5% in August, citing a rise in demand domestically and in China and Brazil, and noting uncorrelated global demand with “very different market trends in various regions of the world.”  As we’ve stressed, China is an important and growing market for Germany.  Volkswagen said it delivered a third of its passenger cars in August to China alone, a rise of 69%.

We continue to like Germany as a slow and steady growth play, which we’ve traded via the etf EWG. With European and global fundamentals improving, we believe demand for German exports will buoy growth. Yet we remain cautious that much of the improvement, through stimulus measures such as the cash for clunkers, is now rear-view and short-time worker contracts, which have held unemployment steady, will be expiring coming into the end of the year.

Matthew Hedrick

Analyst