German IFO, EU Econ. Forecast, LTRO2 Repay

After a hard week on the markets, Friday does not let us off easy. Right after the messy Fed minutes and European PMI numbers, with Italian elections right around the corner, there are several key events which will most likely haunt us during the coming months.

Germany February IFO Business Climate Index (09:00 GMT)
IFO indices are expected to show a small but steady improvement from January’s report. As the PMI numbers for February were published yesterday and Germany’s relatively strong export order books were specifically mentioned in the analyst’s comments, the consensus forecast of the Business expectations component might have slightly moved upwards (for more on PMI see my yesterday’s article and on IFO, this article from last November).


The institute’s report on January’s IFO indices makes for interesting reading with clear charts. It seems that the improvement over the past couple of months has mostly been because of higher expectations while the situation-readings have been practically unchanged. The expectations have been running especially high in the manufacturing and construction sectors for the past two months, and we’ve only had one month’s uptick on the manufacturing’s situation-number - not necessarily proof of a lasting positive trend.

I would watch the headline figures for any obvious surprises, but more importantly, I would like to see the high expectations transfer over to higher situation-readings as well. If that shift does not materialize, the gap between the two will close by collapsing expectations. There are too many negative themes in the markets now for the sentiment to keep up much longer. Previously, the lag has not lasted longer than couple of months. Also note that the wholesale and retail sectors are not that hot either way - or expectations-wise. Germany’s economy is hoping to ride on an export boom to China, and enjoy a mini-real estate boom of its own thanks to the easy monetary policy. Too bad that same monetary policy is so easy for Germany and too tight for everyone else – especially the periphery. The February survey will be made available for download at 09:30 GMT.

EU Winter Economic Forecasts (10:00 GMT).
The European Commission publishes its latest macro forecasts. It is currently produced three times per year, and focuses on the EU Member States, the euro area and the EU, but also includes outlooks for candidate countries and some non-EU countries. The report must surely address France’s economic slide, the bailout needs of Cyprus and the continuing troubles in the original PIIGS-countries (Portugal, Ireland, Italy, Greece, Spain). While the report will probably make a heroic attempt at painting a somewhat rosy picture with “light at the end of the tunnel, recovery seen in second half of 2013”-type of guesswork, it will also present an official view that is used as a basis for various surveillance procedures.
Of note: just recently it was leaked to the press that commissioner Olli Rehn has advised everyone to refrain from "unconstructive" criticism of the austerity policies. Recent research by the IMF and, well, everybody, has shown that austerity has in fact been counterproductive. As this is something the commissioner does not want talked about, there is very little chance that the report would address the true underlying problems - too much debt and fixed exchange rates. The commission will surely not admit that the euro isn't working, so this suggests more muddle-through until the elections in Italy and Germany are done and the bailout of Cyprus is voted through by national parliaments.

Eurozone LTRO-2 Repayment (11:00 GMT)
A year ago the European Central Bank offered cheap loans to willing banks against collateral. These longer-term refinancing operation (LTRO) loans were offered in two allotments. The loans included an early repayment option. Of the first three-year LTRO of EUR 489 billion, EUR 149.46 bn has already been paid back. Today will be the first opportunity to announce repayments of the second three-year LTRO of EUR 530 bn. Polls suggest repayments of between EUR 120-150 bn.

It is no secret that the LTRO was largely put in place to save the Italian and Spanish banks and their sovereigns (so-called Sarko-trade, or stealth-QE, depending whom one asks). Most banks have been eager to pay back the loans early. It makes sense, as carry trade opportunities are fewer now as European bond yields have fallen, and also, having large amounts of LTRO-loans carries a stigma. For banks, being strong and not needing any almost-free central bank money is important for confidence. So interpreting the number is a mixed bag: paying back the LTRO lowers the banking system’s liquidity, which is negative, but also it shows that banks are more confident, which is good. As with the first LTRO-allotment, the bulk of the repayments were made at the first opportunity with small weekly repayments following. This is expected now as well. One thing, though – the Italian elections have become a closer call than anyone had believed just recently, so the Italian banks might want to hang on to their LTRO-money for a while.