European Markets on Hold for US GDP, FOMC

How Did the Markets React? 

Data out of the Euro-zone today showed surprise results all-around, but with the US FOMC’s interest rate decision on deck today at 19:15GMT, European markets ignored the reports and held at a near standstill. The German labor market proved to be the shining star of the Euro-zone this morning as the unemployment level dropped a greater-than-expected 106,000, bringing the unemployment rate to 9.5 percent – the lowest since April 2002. Meanwhile, Euro-zone consumer confidence fell back in January to a reading of -7 from -9, as Germany’s VAT hike to 19 percent from 16 percent took its toll. General economic confidence declined as well, with the survey reading hitting 109.2 from a downwardly revised 109.8. Also released this morning was the January CPI estimate for the Euro-zone, which went unchanged from December at 1.9 percent against expectations of a pickup to 2.1 percent. Overall, the reports highlighted that economic expansion and export growth has led to a major tightening of the labor market. However, sentiment amongst households has taken a hit in January as consumers face higher taxes, which could hurt the retail sector in the first quarter. Nevertheless, inflation concerns still weigh heavily within the European Central Bank, despite CPI’s failure to rise in January, and leave the central bank on track to tighten monetary policy in March.

Bonds – German 10-Year Bunds

Yields on 10-year German bund futures went unchanged at 4.100 percent by the European afternoon as prices stagnated near the top of its short-term range at 97.17. Bunds showed absolutely no reaction to economic releases out of the Euro-zone as traders hold their breaths for news out of the US, including: Q4 GDP at 13:30GMT and FOMC rate decision at 19:15GMT. Overall, the releases are expected to show stronger growth in Q4 and a hawkish statement from the Fed, which could lead US Treasuries to plunge and subsequently take bunds down with them. 

FX – EUR/USD

Euro declined steadily against the US dollar in the early European session as traders ignored the economic data at hand and instead ran the greenback higher on bullish expectations for US Q4 GDP and hawkish expectations for the FOMC minutes. However, the euro rallied higher against the British Pound, with the cross jumping 40 points over the course of the morning to a high of 0.6641 – very strong price action for a typically quiet-trading pair. While the economic releases from the Euro-zone were generally mixed, the results did not change European Central Bank rate hike expectations for March.

The picture remains cloudy for the EURUSD for the rest of the week, as more market-moving data out of the US is set to post on Friday. The broadly-watch, nearly-impossible-to-predict NFP report is estimated to slip lower, but any surprise will cause great volatility in the markets, especially in the EURUSD pair. Nevertheless, when trading calms between releases, euro could be on track to make gains above the 1.3000 level as tightening by the ECB remains on the horizon.

Equities – Xetra DAX Index

Despite strong economic reports from the German labor markets, stocks on the country’s equity index dropped, led by Infineon Technologies AG, SAP AG and DaimlerChrysler AG. The Xetra DAX Index declined 0.3 percent to 6764.83 by the European afternoon, edging towards short-term support near the 6750 level. Infineon, Europe's second-largest maker of semiconductors, dropped 2.1 percent to 10.94 euros after Hynix Semiconductor Inc., Asia's No. 2 maker of memory chips, forecast that prices of DRAM computer chips will decline 30 percent this year. Meanwhile, DaimlerChrysler, the world's fifth-largest carmaker, slid or 1.1 percent to 47.94 euros after crude oil made the biggest gain in 16 months yesterday, raising concerns that consumers will delay buying cars.