Cycle Compression in Germany

QI TAKEAWAY —  The disconnect between ex-energy commodities, the dollar and the real global economy is becoming more apparent as signs of a spreading slowdown proliferate. The lack of Fed tools to address stagflation should cap long-maturity rates as policy errors, plural, get priced into risky asset prices.

  1. Per the ifo Institute, at -4.6 points, German business expectations were decidedly below trend in October after running an above average 13.4 points in June; the 18-point swing in 4 months has historical comparisons only to the pandemic’s onset and Great Financial Crisis
  2. ifo’s Business Cycle Clock, which tracks German business conditions and expectations, was in the “slowdown” quadrant for a second straight month in October; this is the first year that has seen all four quadrants traversed on account of the pandemic’s cycle hyper-compression
  3. China’s manufacturing New Orders-Inventories spread has slowed, helping temper German business expectations; a continued slowdown in activity could lead ECB policymakers to turn dovish just as the Fed begins its tapering efforts, piling onto euro bearishness