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Confidence in the Slush

Today’s release of German Consumer Confidence from GfK yields two observations: Germans are neither overly optimistic, nor glaringly negative on current and future economic expectations. This rhymes with our call that macro headwinds are still bearing down on confidence in Germany, and throughout the Eurozone. The chart below shows that while consumers’ economic and income expectations rose for the December survey, the overall index of sentiment (January) and consumers’ propensity to spend deteriorated.

While one survey doesn’t make a thesis, it contributes to evidence that the threat of future joblessness is still weighing on German sentiment. And the trend appears similar throughout much of the Eurozone. Consumer confidence in Denmark fell to -3.6 in December from -2.4 in the previous month in a survey yesterday, which contributed to the underperformance of its equity market (OMX Copenhagen) in yesterday’s close versus an otherwise positive close for most Western European equity markets, including the DAX that climbed to a YTD high and today further inched upwards.

Although German labor market conditions improved in the Fall, which has helped to stabilize the unemployment rate, and despite Chancellor Merkel’s recent extension of state-subsidized part-time work program for another year, the survey suggests that other concerns, including expectations of price inflation, especially energy prices, persist. With major stimulus programs (including a robust cash-for-clunkers program) in the rear view, consumers may shun spending to increasing savings, which could diminish growth prospects from private expenditure next year. 

Although forecast for modest GDP growth next year, we expect German’s  robust industrial and manufacturing export base to lead Eurozone economies as its major trading partners heat up.  In recent weeks we’re seeing a trend of outperformance from the DAX over the FTSE.  At times this year we’ve traded Germany on the long side via the etf EWG and the UK on the short side via EWU.

We’re currently not invested in Europe and happy to stand out of the way of a fairly long list of countries (including Ireland, Spain, UK) whose future growth is threatened by ballooning debt balance sheets, among other structural issues; certainly Greece has made the most recent splashes on this front.

Matthew Hedrick

Analyst

Confidence in the Slush - gfk