After the U.S. Thanksgiving, a low-volume Friday would normally be expected. However, today the ongoing EU summit on budget (and on Greece next Monday) are both bound to generate market-moving statements, while Germany's all-important IFO and Q3 GDP will be closely watched.
Germany Q3 Gross Domestic Production (07:00) Consensus forecast is that the Final GDP grew 0.2% q-q and 0.9% y-y. The numbers are in a way old news, as the latest PMIs and other indicators have more or less confirmed that also the fourth quarter will be near-zero growth and all eyes are thus already looking towards 2013. Still, some commentators insist that the GDP numbers will be important -- not because of the data content, but their political power: deteriorating business sentiment is one thing and can be explained and hoped away (google for confidence fairy), but hard numbers pointing to near-zero growth will get their share of publicity and thus exert political pressure. Merkel seems anxious to have a temporary solution on Greece, hoping it would help Germany’s real activity to pick up ahead of the next year’s elections. Thus, again, bad numbers would be short-term bad for EUR/USD, but medium-term good. Germany has been enjoying a minor real estate boom lately due to demand from safe haven-seeking investors, and that has obviously helped the real economy. This would show up in the detailed breakdown of the GDP, but will most likely not bring anything new to the discussion -- the IFO index sectoral breakdown has told the story already.
Germany November IFO Index (09:00)
After yesterday’s PMIs, Europe’s number of the week is definitely the Germany’s IFO index. Consensus forecast sees the Business Expectations falling slightly to 92.9 from October’s 93.2 and the Current Assessment a bit more to 106.3 from the previous 107.3. As the chart shows, the Business Expectations (BE) is a good predictor of the Current Assessment (CA), often turning months in advance. It also gives a good perspective on how far the CA can fall, as during periods when the BE is leading far away from the CA, the CA has a tendency to “fill the gap”. It is also worth pointing out that the 2001-recession low for the BE was around 90 and the 2008-recession low around 80.
Looking a bit deeper behind the headline numbers, the four sectors mapped by the IFO are Manufacturing, Construction, Wholesaling and Retailing. There are big differences and some interesting developments between these groups: the Current Assessment of Wholesaling and especially Manufacturing have been falling since the mid-2011, while CA of Retailing has seen only modest falls and CA of Construction has retained its high levels. Business Expectations of both the Manufacturing and Wholesaling sectors are pointing to further weakness, while the BE of Retailing has only recently started plummeting. The BE of Construction sector remains at elevated levels. In summary, the outlook looks bleak -- with the rot first appearing in manufacturing, moving to wholesale, then retail and finally construction. I would look closely at the Business Expectations of Manufacturing sector and secondly the Construction sector. Should the real estate boom wane, the overall growth prospects would look really nasty - even suggesting a nostalgia trip to 2008?
Italy September Retail Sales (09:00) are expected to increase by around 0.3% m-m following a zero in August. After the Thursday’s successful Spanish bond auction, the lower PIIGS (Portugal, Italy, Ireland, Greece, Spain) government bond yields and generic optimism, a bad number in the area of -0.5% might "surprise" and cause a minor sell-off in EUR/USD -- but just as with the German GDP, this is already old news and the main thing to watch for will be the IFO.