As expected, the markets had a tough start to the week.
There were a couple of technical factors, but the COVID situation is apparently still driving consumer sentiment.
And that’s likely to continue to be the theme for the data coming out of Germany this week.
Analysts are a little more optimistic. Maybe some improving market fundamentals can help turn around risk sentiment.
Germany’s Consumers Are Lagging
With the lifting of COVID restrictions at the start of summer, consumer sentiment in Germany started to improve.
Then, during the vacation period of August and now going into September, the number of cases has been spiking across Europe.
Notably, there have been concentrations in holiday hotspots, with the ever-popular destinations of Croatia and Spain recording higher case numbers than during the “first wave”.
Germany’s case rates have increased, but nowhere near at the scale of other countries, including its neighbors.
Even so, consumer sentiment weakened last month, for the first time since May.
Now, there is serious talk of countries reimposing lockdowns. This is despite leaders insisting that this was out of the question just a couple of weeks ago.
Yesterday Health Minister Spahn insisted that Germany was able to cope with the increase in cases, though expressed concern.
What We Are Looking For
Expectations are for the October GfK Consumer Sentiment survey to show a marginal improvement over the prior month, coming in at -1.0 compared to -1.8 prior.
However, some economists are less optimistic. And there are quite a few arguing that the data will be worse than the prior month.
In that case, a drop below -2.0 is likely to contribute to further risk-off sentiment in the markets. This is because it will affirm a downward trajectory.
A move back into positive territory might give an encouraging sign to the markets, and help support the euro.
Business Outlook Expected to Remain Healthy
On Thursday, we have the release of the September Ifo Business Climate Survey. Expectations are for it to take a modest step back.
However, this is likely to not have as much of a negative impact on the markets. This is because we expect a reevaluation of the current situation to cause the drop.
We all know the economy is in trouble now. But the hope is that, in the future, it will improve. And that hope seems to remain intact among economists trying to gauge the situation.
Projections are for the Ifo Business climate to come in at 91.4. This is a bit lower than the 92.6 in August, and still in contraction.
Expectations are for the change to be driven by the current situation component, projected at 86.2 compared to 87.9 prior. The more important Business Expectations component should remain virtually the same at 97.2 compared to 97.5 prior.
If the Ifo Business Climate drops substantially because of the current situation, the market is likely to take that in stride. But if there is a significant drop further into contraction in the Business Expectation element, it could drag the euro down.
However, on the plus side, a surprise Business Expectation reading over 100 (return to expansion) might give the euro a substantial boost.