Euro Strengthens on EZ Data, Hawkish ECB Commentary

How Did the Markets React? 

Economic data out of the Euro-zone was materially stronger today, as French consumer spending during the month of December unexpectedly surged 1.3 percent, bringing the annual rate to 6.8 percent – the highest since September 1998. The gain was led by a 2.0 percent jump in car sales after the figure dropped 1.0 percent the month prior. Sales in the retail sector also contributed significantly at 1.2 percent for the month, which bodes well for Q4 consumption and GDP for France and the Euro-zone as a whole. Meanwhile, Euro-zone Industrial New Orders rose 1.4 percent – well above expectations of a more moderate 1.0 percent gain and a rebound from October’s upwardly revised -0.5 percent reading. The data indicates that demand in the Industrial sector remains solid and should continue to drive growth in the region. The only caveat, however, is that the data is relatively old, as it records only November's results and may not properly reflect current conditions under higher exchange rates. The FX market was the only one to pay heed to today’s releases out of the Euro-zone, as fixed income markets focused on technical factors and equities fell victim to declines in the tech and transport sectors.

Bonds – German 10-Year Bunds

Bund bulls were in full force today – typical price action during a day when benchmark equity indices took a hit – as prices on 10-year bunds rose to 97.76 and yields slipped one basis point to 4.000 percent. The change in European fixed income price action came despite solid economic data out of the area, as stronger-than-expected French consumer spending and a jump in Euro-zone industrial new orders improve the prospects for a March hike by the European Central Bank. Nevertheless, with the ECB anticipated to hold rates steady in February, bunds prices are seeing little downside pressure.






FX – EUR/USD

Euro rallied nearly 100 points throughout early European trade and punched through the 1.3000 level on strong economic data out of the Euro-zone and hawkish commentary from European Central Bank executive board member Lorenzo Bini Smaghi. EUR/USD gradually rose nearly 40 points in the 40 minutes before the French release as traders anticipated better-than-expected consumption figures. Meanwhile, encouraging results out of the Euro-zone manufacturing sector pushed the euro to 1.3020 from 1.2977 as the data underpinned the ECB’s case for a rate hike to 3.75 percent. Additionally, Mr. Bini Smaghi noted that interest rates are still “accommodating” and that "if the growth scenario is confirmed, not adapting interest rates would mean excessive increasing liquidity.” Despite the widespread tightening bias within the European central bank, ECB MPC members are still anticipated to hold rates steady in February and opt to wait until March to increase interest rates.

 

Equities – Xetra DAX Index

European equities generally ignored economic data out of the Euro-zone as modest gains for a number of banking and oil stocks were offset by a weaker tech sector following an earnings warning from Alcatel-Lucent. The declines sent Frankfurt’s Xetra DAX down 0.8 percent to 6,632.91. Software AG, Germany's second-largest software company, plunged 3.8 percent to 58 euros after the company forecasted that 2007 sales and profitability will rise at a slower pace than some analysts had estimated. Meanwhile, Deutsche Lufthansa, Europe's second-largest airline, dropped 1.3 percent, to 21.72 euros. Crude oil rose on higher demand for heating oil in the U.S. and Europe amid colder weather, subsequently raising costs for travel operators and airlines.