German Spending Data Better Than Expected

In Germany, where we have concerns about the pace of the recovery there after the drop in 2nd quarter GDP growth to a crawl of 0.1% q/q we had some positive fundamental data. Retail sales were flat on the month - which on its own is not great - but it comes after one of the strongest months in years, and it was much better than expectations.

As Bloomberg's article goes on to explain, with global growth slowing and the impact that may have on German exports, it will be up to the German consumer to make up for the drop from expected drop in trade.

From Bloomberg: German retail sales unexpectedly held steady in July after surging the most in more than three years the previous month.

Sales, adjusted for inflation and seasonal swings, were unchanged from June, when they jumped 4.5 percent, the Federal Statistics Office in Wiesbaden said today. Economists had forecast a 1.5 percent decline, the median of 20 estimates in a Bloomberg News survey shows. Sales fell 1.6 percent in the year.

Unemployment is still declining but wages aren't rising significantly so a consumption boom is rather unlikely, said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. Exports are slowing as the global economy loses steam. Private consumption is becoming more important as a result, but I don't see it becoming the driver of German growth.

Unemployment Extends Declines into 26th Month

We had a second report from Germany, which showed the number of unemployed fell by 8K in August, right around expectations. It's the 26th straight month that unemployment has declined in the country, and the unemployment rate currently sits at 7%, a post-reunification best.


Somewhere President Obama and his economic team are looking at these numbers and this chart in the unemploymetn rate and salivating.

Unemployment in Euro-zone as  a Whole at 10%

However, while the performance in Germany's labor market has been quite strong over the past 2 years, when we look at the Euro-zone region as a whole, things are not as rosy. In fact the Euro-zone has a higher unemployment rate than the US.

Today, data showed the Euro-zone unemployment rate climbing to 10%, which compares to a rate of 9.1% in the US, a 8.0% rate in the UK, and 4.7% in Japan.


Such high unemployment will constrict the overall Euro-zone's customer confidence and will keep the lid on domestic demand. It should also add to an easing in price pressures, which can ease the pressure on the ECB to raise interest rates this year and in the first half of 2012.

The prospect of an ECB in a neutral stance undercuts one of the fundamental factors that has helped propel the EUR -the expectation of a widening interest rate advantage. While the EUR/USD may still gain on the back of a more dovish Fed, when we compare the EUR to other higher yielders, we may see it struggle.

Nick Nasad
Chief Market Analyst