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German ZEW Douses Euro, Weak US Statistics Reignites

Posted by Joseph Trevisani on Feb 18, 2014 11:41:00 AM

A mixed outlook from Germany gave euro bulls a pause this morning but unexpectedly poor U.S. manufacturing and housing data and their potential impact on monetary policy brought the euro back to within points of it January 1st high.

The ZEW survey which polls analysts and investors and aims to predict economic attitudes six months out dropped to 55.7 in February from 61.7 last month, the second fall in a row, reported the ZEW Center for European Economic Research in Mannheim. An assessment of the current situation rose to 50.0 from 41.2 in January. Economists had predicted 61.5 and 44.0 respectively in the Bloomberg survey.

The euro dropped from 1.3724 to 1.3711 at the release and as low as 1.3706, but within 30 minutes had recovered its original level at 1.3724 and then moved higher to 1.3733.

German economic expectations from the ZEW survey had reached a seven year high at 62.0 in December. The current situation measure was the best in more than two years since registering 53.5 in August 2011.

Despite the generally positive prospects for the export dominated German economy which grew 0.4 percent in the fourth quarter, the outlook outside of Europe's largest economy is far from sanguine.

Unemployment across the euro zone has been rising for two years and at 12.0 percent is close to its record high. Greece is on the verge of its third bailout and the more than two year decline in inflation to 0.7 percent year on year in January has ECB policy makers casting about for novel ways to pump up the money supply in the 18-nation monetary union.

Just after the New York open sentiment reversed as the euro got a strong boost from two U.S statistics.

The Empire State Manufacturing Survey for February issued at 8:30 am by the Federal Reserve Bank of New York came in at 4.48, well under the 8.50 estimate and barely third of the 12.51 score in January.

The euro responded by jumping from 1.3733 to 1.3746 within five minutes.

Thirty minutes later the February NAHB Index from the National Association of Home Builders dipped 10 points to 46. It was the lowest reading and the first below 50 since May of last year. A score above 50 indicates that more builders view conditions as good rather than poor.

The euro climbed from 1.3744 to 1.3769, the day's high, within 10 minutes and has not traded back below its starting point since then.

Builders’ sentiment in all four geographic divisions fell: the Northeast sank to 33 from 41; the Midwest to 50 from 59; the South to 46 from 53 and the West to 57 from 71.  The index of future sales dropped to 54 from 60, nationwide traffic slipped to 31 from 40 and present sales declined to 52 from 61.

The gains in home prices and sales have been one of the stronger aspects of the U.S economy of the past two years. Aided by mortgage rates which until last May were near historical lows, the improvement in the housing market has been credited with boosting the economy as homeowners translate the recovery in their largest asset into consumer spending.

The current 30 year mortgage rate of 4.25 percent (Bankrate.com) is about 75 percent of the 20 year average of 5.63 percent.  But the rise in the rate from its May low has put a crimp in the sales of existing homes, the largest category of purchases. From a four year peak of 5.39 million annual sales in July and August last year, sales have fallen 10 percent to 4.87 million in December and are project to slip to 4.67 million when the January numbers are released on the 21st.

Today's statistics continue this month's string of weaker than forecast U.S economic statistics, including manufacturing PMI, vehicle sales, factory orders, non-farm payrolls, retail sales, industrial production and  capacity utilization, that have increased  speculation the Federal Reserve might halt or reverse its reduction in quantitative easing purchases at its March FOMC meeting.

So far indications from the governors and the new Chairwoman Janet Yellen are that the reductions will continue with another $10 billion cut to $55 billion on March 18th but the strengthening euro indicates that the odds of a dollar weakening pause are rising.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Alpha Trader,  Bloomberg

 

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