Mikkel Rosenvold
1 week ago

This European Economy Could Make A Surprising Comeback

Macro Analyst Andreas Steno identifies key geographic target for coming months
Photo by pandionhiatus3
Photo by pandionhiatus3

The German economy is showing unexpected signs of recovery despite recent economic challenges. Analyst Andreas Steno from Steno Research highlights key indicators suggesting that Germany might be on the verge of a rebound, contrary to prevailing pessimism.

Today’s slightly hawkish HICP print from Germany indicates rising yields despite a dovish CPI surprise. The headline CPI surprised at 0.2% MoM, but the HICP figure, influenced by recreation, culture, and food prices, came in higher. This discrepancy suggests that core price pressures remain a concern for the ECB, potentially affecting their policy decisions in June.

Steno notes that May saw goods disinflation with a decrease in food prices by -0.25%, although services categories showed upward trends. This contributed to the HICP being higher than expected. German price expectations, influenced by freight rates and manufacturing prices, might indicate further inflationary pressures throughout the summer.

The negative sentiment towards the German economy has persisted in 2024, with manufacturing conditions showing limited improvement. However, the recent IFO report suggests that parts of the German economy are beginning to recover. Steno points out that energy-sensitive sectors, such as chemicals, and indicators like the German congestion index, signal better times ahead for industrial production.

One potential risk is the alignment of improving fundamentals with rising natural gas prices, which could impact German industrials adversely in the coming months. Nevertheless, the IFO employment survey shows stabilization, with wages yet to fully reflect the labor market conditions due to collective bargaining agreements from 2023.

Steno explains that despite ongoing challenges, there are green shoots in the German economy. The chemicals sector, a reliable economic bellwether, shows signs of recovery. This improvement, coupled with base effects in inflation, may challenge the ECB in early Q4, potentially leading to a shallow rate-cutting cycle unless the Fed and BoE make significant moves.

The negative sentiment towards the German economy has persisted in 2024, with manufacturing conditions showing limited improvement. However, the recent IFO report suggests that parts of the German economy are beginning to recover. Steno points out that energy-sensitive sectors, such as chemicals, and indicators like the German congestion index, signal better times ahead for industrial production.

One potential risk is the alignment of improving fundamentals with rising natural gas prices, which could impact German industrials adversely in the coming months. Nevertheless, the IFO employment survey shows stabilization, with wages yet to fully reflect the labor market conditions due to collective bargaining agreements from 2023.

Steno explains that despite ongoing challenges, there are green shoots in the German economy. The chemicals sector, a reliable economic bellwether, shows signs of recovery. This improvement, coupled with base effects in inflation, may challenge the ECB in early Q4, potentially leading to a shallow rate-cutting cycle unless the Fed and BoE make significant moves.

For investors, paying attention to EUR-rates and EUR-inflation is strategic. Industrial metals and energy commodities are likely to see increased demand from German industrial bluechips in the coming months. The IFO data suggests that while the overall trends remain cautious, there are opportunities for trading Germany, especially as a potential economic rebound is not yet fully priced in by the market.

In conclusion, the German economy might be poised for a surprising recovery, driven by improvements in key sectors and indicators. This potential rebound, while still uncertain, offers strategic opportunities for investors to capitalize on Germany’s evolving economic landscape. For detailed analysis and insights, subscribing to Steno Research's Premium plan is recommended.

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