GE IFO Beats But Euro Restrained By Deflation Worries

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Market Drivers for February 24, 2014

Draghi says that March ECB may be key

GE IFO best since 2011 at 111.3 vs. 110.6 prior

Nikkei -0.19% Europe 0.10%

Oil $102/bbl

Gold $1329/oz.

Europe and Asia:

NZD Credit card sales 9.2%% vs. 4.7%

EUR GE IFO 111.3 vs 110.7

North America:

USD Flash Services PMI 9:00 AM

Better than expected German IFO figures popped the EUR/USD to test the monthly highs in early morning European dealing, but the pair stalled at the 1.3770 level as concerns over EZ deflation outweighed the surprisingly robust results from Germany.

The IFO data beat on all fronts with the business climate printing at 111.3 versus 110.7 eyed and current assessment rising to 114.2 versus 112.4 forecast. Even the business expectations component rose slightly to 108.3 versus 108.2 prior. Overall this was the best IFO reading since 2011 and suggests that German economy is operating smoothly even as other EZ economies continue to sputter.

IFO economist Wohrabe noted that German consumers are now contributing to growth as retail spending picks up. For a long time consumption in Germany has been restrained, but the recent pick up in growth along with ultra low interest rates that have made savings unattractive have pushed the German’s to spend more.

According to Mr. Wohrabe other sectors were doing well also as construction and manufacturing remained stable with manufacturing benefitting from high order rate. Mr. Wohrabe noted that the turbulence in emerging markets affected export expectations only slightly.

Yet the euro could not clear the monthly highs as investors remain concerned about the persistent deflationary pressures in the region. Over the weekend ECB President Mario Draghi noted that the March meeting of the governing council could be key to EZ monetary policy going forward. If inflation measures do not pick up the ECB may be forced to consider negative interest rates – something that several council members have hinted at over the past month.

A move towards negative rates would weigh on the euro and further reduce incentives for saving, thus stimulating demand in the region. With the OMT program now under a cloud of legal uncertainty, any type of QE like action is not an option for ECB right now which is why negative rates may be its only option.

Today’s final EZ CPI figures came in at 0.8% which was a bit better than 0.7% eyed, but nevertheless they remain woefully low and markets will be keenly focused on German CPI data this Thursday to see if the deflationary price pressures in the region have abated. In the meantime the EUR/USD remains contained in a tight range and could continue to trade quietly for the rest of the day as US calendar remains relatively barren with only Flash PMI services on the docket.

Boris Schlossberg
Managing Director

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