The past few days have been an incredibly tumultuous time for investors around the globe as new risks and worries enter the market seemingly every day. While the situation remains poor in the United States, events aren’t much better in Europe as the major powers on the continent cannot seem to agree on how best to proceed with the debt crisis plaguing some of the world’s largest economies. Italy and Spain still have debt that is yielding more than 5% while smaller nations, such as Greece and Portugal, have along ago crossed the double-digit yield threshold, sparking fears that any further changes to the economic system would result in large scale default across the region. Thanks to these worries, the pressure is now piling up on large, relatively well off nations in the euro zone, such as Germany, to carry the weight of the more indebted Southern members through this difficult time. While Germany has been (reluctantly) up to the task so far, inflation has been creeping up in the nation, forcing rates higher across the region in order to promote price stability. Whether this rate increases have had any effect could be extremely important to the near term trajectory of the European economy and could led to further hikes or a more stable monetary policy in the months ahead, if inflation seems to be under control. As a result, investors will likely focus in on the important release of Germany’s most recent CPI figures later today, helping to signal how Europe’s largest economy has held up during this crisis.
German CPI is expected to show a 0.4% change in month-over-month terms and a nearly 2.4% rise in year-over-year figures, which if realized, would represent a modest rate of inflation that is slightly above the ECB’s target of 2%. Unlike the Fed which has a dual mandate of full employment and low inflation, the ECB’s primary focus is on price stability so further hikes to interest rates cannot be ruled out if German inflation remains above this 2% target. However, with that being said, commodity prices have come down sharply in the past few days in light of the ongoing financial crisis so additional hikes to rates may be put off for some time if input costs look to remain tame in the near future [see more on EWG's Fact Sheet].
These sharp declines in commodity prices could help to cancel out some of the recent inflation that the German economy has experienced as the rate of price increases accelerated in the most recent reading up to 0.4% from 0.1% changes in the previous two months. “Core inflation might yet rise again in response to the earlier strength of the German economy. However, with the business surveys suggesting that the recovery is already faltering, any increase is likely to prove to be short-lived,” said Jennifer McKeown of Capital Economics. “July’s ECB interest rate hike might prove to be the last in the cycle.” [Five ETFs For A Tumbling Euro]
Thanks to this key data release, as well as further clarification on the situation in the euro zone, investors should look for the iShares MSCI Germany Index Fund (EWG) to remain in focus throughout today’s trading session. Like many broad equity ETFs, EWG has been slumping heavily over the past few weeks as this popular fund has declined by nearly 15% in the past four weeks alone. Yet, despite these losses, EWG came roaring back in Tuesday trading, gaining well over 4% on the day. Should investors see moderating or flat inflation levels, this trend could continue into Wednesday trading and we could see further gains in EWG. If, however, inflation exceeds the 0.4% m/m change, it could spark fears of further rate hikes in the near future, and cause EWG to resume its short term trend lower in Wednesday’s session [see more charts of EWG here].
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Disclosure: Long EWG.