Ahead of German ZEW & IFO

<p>Both of Germany’s key business surveys are due this week. ZEW and IFO surveys involve responses from investors/managers (biased towards ECB’s OMT promise, Fed’s QE3, […]</p>

Both of Germany’s key business surveys are due this week. ZEW and IFO surveys involve responses from investors/managers (biased towards ECB’s OMT promise, Fed’s QE3, Greece debt swap deal instead of econ/business effect) rather than the PMI, which involves purchasing managers and decision-makers, segmented by output, new orders and inventories.

Starting with Tuesday’s 10am GMT release, is the ZEW survey, which  targets financial market participants and is more influenced by market conditions such as equity markets, bond yields and liquidity, rather than the actual macro indicators, which tend to have more of a lag.

The ZEW expectations index rose over the last four months and is expected to a hit an eight-month high at 12.0 from 6.9 in December.

The ZEW current assessment index remains near two-year lows, attempting to build on its December’s 0.3 rebound to 5.7. It is expected at 6.2.

Due on Friday at 9am GMT is the release of the IFO business survey and its three components.

IFO current assessment is the most “current” coincident indicator of all three components and is the worst performer of all three. This is similar to the ZEW’s current assessment component, which also underperforms its “expectations” component. Hovering near three-year lows, the CA component will be important in revealing whether it will join the other forward-looking surveys into recovery, hence, reflecting improved sentiment and likely leading to expanded spending plans from businesses.

IFO business climate for January is expected to show its third monthly rise, reaching 103 (from December’s 103.4), after hitting two-year lows in October. The index has regained its three–month moving average for the first time since April 2012.

IFO expectations business climate is the highest of all three IFO components, standing at seven-month highs, is expected to reach 98.5 from 97.9 in February.

The charts below clearly show how the expectations components of the both the IFO & ZEW surveys are quick to recover and serve as a better leading indicator for equities and the euro. Considering the 31% rally in the Dax and 11% rise in the euro since June, financial metrics in Germany and the Eurozone are certain to spillover onto further optimism in both surveys and likely to feed into a positive self-reinforcing cycle. Extending into a two-week consolidation with support at 1.3255, EUR/USD eyes a renewed recovery to 1.3380, followed by 1.3420.

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