The Euro is consolidating near its all time highs against the US dollar, even though we are reminded on a near daily basis about the risks to Eurozone growth.
Last night I was having dinner with a businessman from France and he described to me the sour mood in Europe. He indicated that businesses are growing very pessimistic which confirms that Europeans are tightening their belts as they learn to deal with high prices. This conversation comes at a perfect time because the marquee release on the Eurozone calendar next week is the German IFO report of business confidence. Like the ZEW survey of analyst confidence, business confidence should have deteriorated materially over the past month. Not only did the European Central Bank raise interest rates for the first time since June 2007, but exports, factory orders and industrial production have also plummeted which confirms that business activity has dropped significantly. The only wrinkle to this outlook was the sharp rebound in German retail sales, but we think that this should be a mute point since higher energy prices was a big reason for the increase in spending. Even though German producer prices grew by more than expected in June, the Eurozone trade deficit deteriorated materially in May, which came as a big surprise to the market.