This morning German fourth-quarter GDP growth data were finally set at 0%. Indeed the growth engine for Europe flatlined in the last quarter and so undershot the 0.1% consensus growth estimate. But there was a revision for the third quarter which finally came at 0.2% instead of 0.1%.
It has to be said that the dismal industrial production data for the last months of 2019 were indicative of a very weak end for that year. However, since the start of 2020, PMIs in Europe have been improving. Even if the Ifo index is far from convincing, the trough might, and should, now be behind us, unless the coronavirus keeps causing global disruptions in production lines and depressing international trade. Germany after all is the export champion and much depends on international trade. Still, several economists believe that by the end of last year, producers had depleted their inventories so much that a rebuild is necessary. And looking through the volatility of net trade and inventory changes, domestic demand in Europe has not been that bad. Overall, unemployment levels are very low, which should support demand. And let’s not forget the growing share of services in developed economies protecting against the wild swings in the manufacturing sector. Still, on the back of today’s weaker-than-expected German data, the overall eurozone fourth-quarter GDP growth could also fall from the expected 0.1% to zero. That would obviously make for depressing headlines.
Meanwhile, in the slipstream of poor European data, the single currency is getting hammered. It is losing ground versus the greenback and also against the Swissy, i.e. the CHF. You need to go back all the way to 2015 to find such low levels. Oddly enough, reports suggest that the SNB is holding back from intervening in the markets. Perhaps because it sees the euro slipping versus most other currencies, as it has become the currency forex traders love to borrow for carry trades. Perhaps it is also because the US has Switzerland on its list of potential currency manipulators. The Swissy, however, seems to be correlated to gold and is following it higher. It is also following the Swiss current account surplus, which has also been increasing since the lows of 2017. Traders fancy the Swissy as the net positioning has jumped to levels not seen since 2017.
The net result of all this is that the SNB is sitting on record levels of forex reserves. It is also the proud owner of over USD 100 billion of US blue chip stocks. FANG stocks are among the biggest positions. Apparently the SNB traders have a good sense of stock picking. However, in most surveys investors see FANG stocks as the biggest bubble in the markets, together with government bonds. It makes the SNB look like a hedge fund, but one which has made huge profits while trying to stabilize its currency. Perhaps it should go for another rate cut, but with the central rate already at -75bps, that might not help much.