This week's thought-provokers for investors
Germany's bond auction fl opped after yields hit a record low. Germany auctioned EUR5bn of the new 1.75% July 2022 dated bund and sold EUR3.87bn. It received bids totalling EUR4.109bn, leaving the auction technically uncovered for the fi rst time since November. Investors baulked at accepting the lowest yields on record as the price for safety. Spanish and Italian bonds in the meantime recouped some of their recent losses.
This week, the German two-year note yield dropped below Japan's for the fi rst time. Now sitting at below 0.1%, it is very close to turning negative. Is this a worrying sign that the German economy is becoming more and more "Japanese"? Or does it simply refl ect the fact that eurozone policy makers and Germany's infl ation phobias are pushing Europe closer to a defl ationary spiral?
German exports unexpectedly climbed 1.6% in February from the previous month, driven by demand from outside Europe and beating economists expectations of a 1.2% drop. German imports too, surged a healthy 3.9% amid low unemployment supporting domestic demand. The trade surplus grew to EUR14.7bn in February.
The German economy should be able to avoid a recession as stronger domestic demand as well as global economic recovery have off set part of the negative impact on foreign sales. Some of Germany's main European export markets were also hit by spending cuts to reduce budget defi cits.
Eurozone industrial production surprisingly rose 0.5% in February, somewhat contrasting the very weak German industrial production (IP) fi gures released last week. While much of the German weakness came from a slump in construction output, this factor is not covered in the eurozone numbers. Nevertheless, it will certainly aff ect GDP growth.
It seems that February's eurozone IP fi gures were boosted by specifi c factors and are likely to overstate the health of the underlying industrial sector, which recent surveys revealed to be rather poor.
Chinese consumer prices rose 3.6% over the full year to March, up from 3.2% in February. The increase was driven by a 7.5% rise in politically sensitive food costs, a further increase from the previous month's 6.2%. Chinese leaders tightened lending and investment curbs repeatedly in 2009 and 2010 to cool infl ation and guide growth to a more sustainable level. However, they reversed this course last December after an unexpectedly sharp fall in export demand due to a slump in global demand.
Infl ation is heating up again after the government shifted its focus from containing price rises to stimulating its slowing economy, which has declined steadily over the past year. This is a signifi cant dilemma for the Chinese government, as rising food costs are politically as dangerous as an economic growth rate persistently falling below 8%.
China returned to a trade surplus in March, with betterthan- expected growth in exports while imports performed worse than anticipated. Exports grew 8.9% y/y in March to USD165.6bn, while imports increased by 5.3% to USD160.3bn. China's global trade surplus came in at USD5.3bn refl ecting a turnaround from February's rare monthly deficit of USD31.5bn. Export growth during January-February was 6.9%, while imports grew by 7.7%.
Current trade growth is well below China's double-digit levels of recent years, and the recent fi gures from China paint a picture of slow but steady growth in global demand while domestic demand growth continues to slow down.
Japan's machinery orders unexpectedly climbed 4.8% in February, vastly exceeding expectations of a 0.8% decline and following a 3.4% rise the previous month. This latest report adds to hopes that gains in capital spending could help sustain a recovery in the world's third-biggest economy.
If increasing domestic demand couples with stronger export growth, Japan's economy might face a surprisingly strong boost in growth later this year as global recovery gains additional traction.
Stefan Angele, Head Investment Management & Member of the Executive Board
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