German GDP (QoQ) (1Q P) (6:00 GMT; 2:00EST) German GDP (YoY) (1Q P) (6:00 GMT; 2:00EST) Expected: 0.3% Expected: 3.1% Previous: 0.9% Previous: 3.7%
How Will The Markets React?
The European markets are coming up on the greatest threat of event risk seen in months. On the docket for Tuesday are preliminary measures of first quarter Gross Domestic Product for Italy, France, Germany and the overall Euro Zone. However, all is not equal, and there is certainly a hierarchy among these different reads. Symbolically, the German number will hit the wires first and it will undoubtedly guide European securities throughout the morning. Therefore, barring any incredible upset from the other two member economy reads, the German number showed dominate fundamental positioning throughout the rest of the calendar?s hurdles. The one exception obviously is the zone report considering it is an aggregate of the broader zone. On the other hand, since the German economy is the largest in Europe, its growth will provide a reliable outlook for activity in the entire region. Considering the market?s expectations, the handicap for tomorrow?s number is already quite low. According to Bloomberg?s survey of economists, the market will be looking growth to cool from a six-year high 3.5 percent annual pace marked in the fourth quarter to a still-impressive 3.1 percent clip in the first three months of this year. For some perspective beyond the comparison of the previous reading, a 3.1 percent read would match the third quarter 2006 number for the second fastest rate of growth in six years. Sorting through the monthly numbers that have hit the wires since the beginning of the year, it is easy to see where the expectations for a slow down are based. Domestic consumption has seen serious wobbles since Chancellor Angela Merkel?s VAT tax hike went into effect on January 1st. In January, retail sales plunged 6.1 percent - the biggest monthly decline since adjusted records began back in February of 1991. Exports also faltered in March, slipping 1.4 percent even as the trade surplus hit a record high.
Bonds - 10-Year Euro Bund Futures
While the euro and equities markets are perfectly positioned for big breakouts on tomorrow?s growth report, bunds seem to have jumped the gun. The active futures contract on the benchmark 10-year bund slid below 113.35 support early Monday morning without impetus of a major economic indicator or event. The move likely comes as a draft from the ECB?s use of the volatility-stoking phrase strong vigilance? at last Thursday?s rate decision - signifying a 25 basis point rate hike was in the cards for June. With these expectations filtering through the market, two year bund yields rallied to a five year high and the spread with the 10-year maturity fell to its smallest difference in years. Nonetheless, such a break before a GDP report is very unusual, and should be monitored closely.
FX - EUR/USD[/B]
The EUR/USD has managed to stage a modest recovery after plunging to the 1.3450 level last Friday and currently trades near resistance at 1.3550. However, the pair could give up some of its gains as first quarter GDP for the Euro-zone is anticipated to slow down to 3.0 percent from 3.3 percent. The key event to watch is not Euro-zone GDP, though, as German GDP for the same period is scheduled to be released three hours earlier at 6:00 GMT. The German figure is forecasted to fall sharply to 3.1 percent from 3.7 percent on an annual basis, as the VAT hike enacted in January likely took its toll. Fortunately for the German economy, its impact may have been blunted by major improvements in the labor market, which have contributed positively to not only sentiment, but consumption as well. Nevertheless, a drop in German GDP will not bode well for the broader Euro-zone reading at 9:00 GMT, and could bring EUR/USD to sell off immediately towards 1.3500. On the other hand, a stronger-than-expected result could lead EUR/USD to rally up towards 1.3600, as resilient GDP in the Euro-zone would signal that the economy is solid enough to withstand a rate hike by the European Central Bank to 4.00 percent in June.
Equities - DAX 100 Index
German stocks fell back today, with the Xetra DAX down 0.3 percent at 7459.61, as a jump in DaimlerChrysler shares was offset by a plunge in Deutsche Postbank. DaimlerChrysler added 1.8 percent to 61.70 euros - seven year high - after the company said private-equity firm Cerberus Capital Management LP will buy the US Chrysler Group for 5.5 billion euros. Meanwhile, Deutsche Postbank, Germany’s biggest consumer bank by clients, dropped 2.2 percent to 66.65 euros after first-quarter net income missed estimates. CFO Marc Hess said earnings were especially hurt as mortgage lending margins fell to 65 basis points in the first quarter from an average of 70 last year.
Declines for the Xetra DAX could continue, as first quarter GDP for the country is anticipated to slow sharply. The quarterly rate of growth is estimated to hit 0.3 percent, down from 0.9 percent in the fourth quarter, while the annual rate is predicted to ease to 3.1 percent from 3.9 percent. Such a dramatic figure could be most damaging to retailers and producers of consumer goods, but would likely impact business shares across the board as weaker expansion may hurt the bottom line. Furthermore, the German GDP report could play into broader European equities, since the Euro-zone GDP figure will be released a few hours later (9:00 GMT). Germany is by far the largest economy in the Euro-zone, so any major shift in the individual country?s GDP will serve as a leading indicator.