Monday's Ifo data release has split opinion on whether the German economy's slump is nearing an end. The crucial Ifo Business Climate Index increased in November to 95.0 from 94.7 in October. The index has now strung together a few positive data points. November's reading marks the third month in a row that the index has risen and is much welcomed after 17 drops in 21 months. The latest numbers did still manage to miss Reuters’ analyst forecast.
It is a sign of how bad things have got that the powerhouse of European manufacturing has humbly accepted today's numbers as good news, or maybe even just not bad news.
Dax — MetaTrader GER30 index — One-hour candles — 20th November–25th November:
During the first two hours of the week's trading, the Dax Index gapped up and printed a five-day high of 13,270. For the bulls, the slight fall back to 13,215 might suggest some consolidation and a gap-fill before further strength. For the bears, it could be that the detail of the report doesn't quite match the headline. Clemens Fuest, president of the Ifo Institute, was speaking with CNBC when he said:
“German manufacturing companies are still stuck in recession… but the overall result is a slight improvement in the index.”
Fuest's statement picked out the services sector, consumer spending and construction as showing strength. Employment remains at high levels — although a greater total number of workers are in positions, individually, they are working less hours. Some firms do see a brighter 2020, but the overall outlook was described by Fuest as “gloomy” (source: CNBC).
Asked if he thought the economy had hit a floor, he replied: “I think it hasn't… the current order backlog continues to be disappointing” (source: CNBC).
The forex markets saw the euro continue in a downward trend. Some of the move can be attributed to the dollar’s strength on the back of rumours that China may be able to concede some ground to the US on the issue of IP rights. From the euro perspective, the Ifo report doesn't offer enough positive news to suggest that Germany has quite finished flirting with recession.
Analysts at ING summarise the latest announcement in their report released Monday:
“Today's Ifo index suggests that the economy, and above all, the manufacturing sector, could be in a phase of bottoming out, a sharp rebound is not yet near.”
The FXStreet summary notes that the next test will be of support rather than resistance levels:
“Critical support awaits at 1.0990, which is November's low and was also a swing low in mid-October. Further down, 1.0925 provided support twice in September, and 1.0879 is the 2019 trough.”
Those taking long positions are betting on a change in the direction of travel. Momentum is currently to the downside, but those who don't want to miss the turn can point to the possibility of outside catalysts. What's also important is that they know exactly where to look — the ailing auto sector, which is still Germany's largest industry.
Trade uncertainty is certainly playing a part, but more granular data suggests that the US-China stand-off was exacerbating rather than causing the problem in global manufacturing. Underlying issues relating to the natural business cycle have, according to Christian Keller, head of economic research at Barclays, been causing the drag on growth. Kellerwas speaking with Squawk Box Europe when he said:
“Industrial production already started to turn sour in the beginning of 2018…. Some of these dynamics were not directly related to trade.”
More importantly, Keller sees inventory and export orders improving. The ING report also considers the back-data and points to“supply side constraints” of 2018 causing a slowdown in activity (source: ING).
On the subject of German auto manufacturing, there has been positive news. In mid-November, Elon Musk made the announcement that Tesla would be building its next Gigafactory in Germany. The plant, which will produce the Model Y SUV, will be sited near Berlin. This is a shrewd move as political incentives may be what is needed to drag the native producers away from petrol and diesel models.
Elon Musk said:
“Some of the best cars in the world are made in Germany, everyone knows that German engineering is outstanding.”
There is one very quick fix to the situation — Germany is one of the few eurozone countries with room to expand its government deficit. The political resistance to budget deficits may be circumvented if it is wrapped up as ‘investment' in ‘green technology'. The chances of this happening can’t be discounted. The long-running irony is that the German manufacturers who appear so beholden to older technologies are based in the country that saw the initial foundation of the Green Party (Die Grünen) in January 1980.
The fate of the Dax and to a lesser extent EURUSD appear to be entwined with the German auto sector. Those looking to get into long positions at the bottom of the market can point to the strength elsewhere in the economy. The Ifo report did highlight that services and consumption are all holding up. If only manufacturing, the last piece of the jigsaw could be added to the picture as well. There are even buttons to press to bring about that change, it’s just that the German government is, currently at least, unwilling to press it.