Stimulus hopes are alive and “well” (depending on your definition of “well”) on Monday.
There’s rampant speculation that Berlin will ultimately relent on its “black zero” fiscal policy in the interest of stimulating the economy during a downturn. Last week, data showed the German economic machine decelerated anew, with the economy shrinking for a second quarter in four.
On Friday, Der Spiegel said Angela Merkel and Finance Minister Olaf Scholz are prepared to run a budget deficit if (or, more likely, “when”) Germany falls into recession. The report cited unnamed sources in the chancellery and finance ministry.
Read more: Hope Floats As Germany Seen Abandoning ‘Black Zero’ Fiscal Straightjacket In Recession
The market now has a number on that – sort of. In remarks over the weekend in Berlin, Scholz said “the last crisis cost us 50 billion euros, according to my estimates”. That will apparently become the new benchmark for markets when it comes to assigning a number to prospective future stimulus from Germany.
“We have to be able to muster that and we can muster that”, he said Sunday, adding that “the biggest problem is uncertainty, including that caused by the Chinese-US trade war”.
On Monday, Bloomberg cited two sources as saying that Germany is in fact prepping a contingency plan in the event the economy careens into a deep recession.
Obviously, this has the potential to put the brakes on the bund rally, which has been the very definition of “unstoppable”.
“It is hard to gauge how much substance there is to it but it is very relevant for bund pricing because the premise of the strong rally we’ve experienced this year is monetary policy exhaustion”, ING strategist Antoine Bouvet remarked.
10-year German yields rose on the fresh stimulus reports. Bund yields are higher by 5-6bp on the day. The DAX is up sharply for a second straight session.
Critics of Germany’s reluctance to spend cite the fact that the country’s entire yield curve is negative and the need to help take some of the onus off monetary policy when it comes to resurrecting the eurozone economy.
Some are highly skeptical of this. “Remember, the law says that the federal government is to abide by a zero budget rule, with room for cyclical adjusted deficits of 0.35% of GDP [and while] extraordinary events allow a more significant deviation, that must be accompanied immediately by a pay-back plan”, BofA wrote last week. For the bank, that pretty clearly suggests there’s not much room for a significant change to fiscal policy, something they call “an abstract notion”.
PMIs are due out of Europe this week and will almost surely underscore the manufacturing malaise. The situation is particular dire in Germany.
ECB officials have been keen to suggest that the Governing Council aims to please next month, when a new easing package is expected.
The Bundesbank on Monday warned about the distinct possibility of a downturn in its monthly report. Output should remain “lackluster” in Q3, the report says and “could continue to fall slightly”. If that’s the case, it would market a second straight quarter of contraction, or, more to the point, a technical recession.
“Future developments will hinge on how long the present economic dichotomy lasts and which direction it takes once it dissolves”, the central bank noted. “As things currently stand, it is unclear whether exports and, by extension, industry will regain their footing before the domestic economy becomes more severely affected”.
