Macro Digest: Ifo deterioration within expectations
The German Ifo Business Climate Index continued deteriorating for the second month in a row. The Ifo index was within the adjusted expectations after yesterday’s flash Purchasing Managers Index, and thus triggered no major moves in the markets.
I do not like the numbers at all, as I explained after the March release. The index improvement was previously driven by real activity in the construction sector and by expectations in others. As can be seen from the chart in the press release's sectoral breakdown, current situation assessments in manufacturing and especially wholesaling are coming down and expectations are correcting down as well. See also Mads Koefoed’s comments: Ifo: German business optimism fades.
Trend down since 2011
Expectations are usually very good leading indicators of real activity, but the history of the Ifo data shows several instances when the expected activity has not been realised afterwards. Overall, the expectations have now moderated and are in line with the current situation. It should be noted that there has been no noticeable improvement in the current situation, even though expectations improved remarkably during the second half of 2012. Actually, the downward trend of the business situation has been clear since 2011, and there have been only seasonal blips of hope around the end of the year, as “Europe has been solved” – for the third time now.
Seasonal euro crisis
This all looks and feels very familiar, and suggests a continuation of the seasonal pattern. Coupled with the slowdown in US and China, Europe’s leaders will again have to meet up and make statements in August. As the European Central Bank’s pledge to backstop through the OMT-programme and the naked CDS- and short-selling bans are currently in place, there are not many real-time thermometers left to monitor the ebb and flow of the European crisis. This probably suits the leaders, at least until the German elections.
Market reaction and impact
We got a knee-jerk selling of the EURUSD but a quick bounce followed. Markets have slowly realised that the ECB’s reaction function is different from the other central banks: it does not matter how bad the macro gets, as basically the ECB is the Bundesbank in disguise. This has left the currency pair trading in narrow ranges, as markets have slowly learned the lesson of only paying attention to the level of breakup risk and Europe’s current account surplus.
There is something that the market is missing here: the MacroScope-blog of Reuters pointed out that the ECB does respond to economic variables, but only as long as they come from Germany. The recent data could be the trigger – unless for the purposes of the upcoming elections the Germans want to pretend that the crisis is not affecting the core countries and everything is fine. If that is the case then the crisis has to escalate a lot before we get a policy response, which would be quite sad.