Muted Eurozone inflation risks

If there was ever an irrefutable reason for the ECB to keep monetary policy in an over-easy state, it would be summed up in three words – muted core inflation. Even the price obsessed Bundesbank hawks should take notice. Fiscal austerity, debt deflation and recession are having a very marked impact on Eurozone dis-inflation. It is a reflection of the very weak state of the Eurozone economy. There is every reason now why the ECB should cut rates again soon. Recession is becoming more embedded and monetary stimulus is not getting through to faster demand. Rates need to come down and stay low for a very long while to help boost recovery. Patience will be a virtue here as it will take a long while for the Eurozone to break out of recession, possibly not even until 2014.

Highlights:

Headline inflation steady at 2% in January
Core inflation eases to 1.3% from 1.5%

German labour market coming back down to earth.

Germany’s labour market is still defying the laws of economic gravity. Unemployment is lower yet again, but may be starting to show early signs of coming back down to earth. It is bound to be a soft landing, but real activity indicators like the recent dip in GDP and the latest contraction in engineering orders in January, highlight the risks that Germany’s economic spring will peter out soon. With so much of German economic demand dependent on its Eurozone partners, entrenched recession forces in the single market and the slowdown in the global economy at large underline the risks ahead for Germany. It will get sucked down into the bog of much slower growth and possible recession in the coming months.

Highlights:

3,000 German jobless fall, lower than expected in February

German enginering orders down 2% y/y

A new order: Grillonomics

The shock waves have been felt right across the Eurozone. Italy has just had a cathartic revolution, with a stunning rejection of the old political order in the general election. A new order is sweeping the country’s hearts and mind. The anti-establishment 5-Star Movement of charismatic Beppe Grillo is on the crest of a populist wave. And nothing breeds more popularity than popularity itself. His party is now Kingmaker between the two mainstream parties, both left in massive disarray by the ground-breaking developments now taking place in Italy. If this revolution gains traction, Italy will not be the only country to feel its effects. Anti-austerity protest groups throughout the Eurozone will have a very strong spiritual champion.

Grillo’s iconoclasm has struck a major chord with the electorate, tired of the recession, disillusioned with the mainstream parties and fed up the bitter pill of austerity. The clear-cut message from voters is that they reject the fiscal prescription in PM Mario Monti’s medicine chest and are looking for a new political alternative. They like Grillo’s rejection of Italy’s pampered political culture, and his commitment to break down government bureaucracy and public sector monopolies. Grillo has also tapped into a popular vein. He is championing green credentials, pledged to get young unemployed back to work and to increase Italy’s minimum wage. So far so good in terms of political populism but what do Grillo economics mean for the long run. Will they be better or worse for Italy and for the Eurozone in the bigger picture?

The markets will have to get used to the concept of Grillonomics. One thing markets dislike with a passion is uncertainty and Grillonomics introduces a new dimension of political and economic risk into the equation. Grillo’s strategy on the economy is pretty vague to date. Even he admits to that. The bigger issue is his implied rejection of budget austerity. If he stays true to his word on turning back the tide on unemployment and reversing harsh government cuts in health and education spending, then fiscal attrition goes out of the window. If voters rejected Monti for this, then Grillo is far too shrewd to pick up the batten on budget bashing in anywhere near the same degree. Grillo says policy considerations will be on a measure-by-measure basis. Monti-style austerity is not an option in Grillo’s book.

This poses a major problem for the markets. If Grillonomics get the market’s thumbs down, Italian stocks and bonds will bear the brunt. Another run on the Italian bond markets might cause a major headache for the ECB’s defense line. Last year the ECB made it pretty clear that it was willing to intervene on any country’s behalf with open market bond purchases, so long as the country requested it and agreed the right conditions. Italy jettisoning budget stringency in favour of counter-cyclical stimulus would not be part of the ECB’s reckoning. It could block any future ECB intervention if the market falls into a crevasse again. In this respect the election-triggered spike in BTP spreads could extend a lot further. Given the uncertain backdrop, there are probably much better buying opportunities for Italian bonds at much lower levels, and probably a lot further ahead too when the dust settles from the election. Zero market exposure is probably the preferred strategy for the moment until a clearer political situation emerges.

As a footnote, protest movements across the Eurozone will be paying very close attention to Italian events. It is interesting that Grillo and the 5-Star Movement came from nothing in the last few years. His success has a lot to do with internet and social media and networking sites. If Grillo’s anti-austerity message starts to catch on in other troubled Eurozone countries then the contagion tail risk is not over yet. It could still have a lot more whip-lash effect to play out in the coming months. Eurozone bond convergence plays look set to be a volatility minefield ahead.

Fair value probablylooks set to head back towards 400-500bps in the months ahead

The mirage of Eurozone economic recovery

The rebound in Eurozone economic confidence indicators is a mirage of recovery. There is a massive gulf between economic hope and economic reality. Eurozone economic activity is underwater and the recession tide is showing no signs of turning for a long while. Eurozone economic sentiment rose for a fourth successive month, but the odds are that we are probably going to see a second successive year of recession in the Eurozone. All the main components of demand remain under duress. Consumers are heavily battened down, the corporate sector has gone to ground, global trade flows are slowing and government austerity looks set to continue for years.

The message remains very clear for the ECB. Rates need to go lower and stay low for many years as they have done in the US, Japan and the UK. Near-zero interest rates combined with extended quantitative easing should be the ECB’s clarion call. Unfortunately it will not be heard from the Bundesbank’s lips and they hold the whip hand for policy in the ECB at the end of the day. The recession looks set to extend throughout 2013, with a faint chance of muted recovery in 2014.

Highlights

• Eurozone economic sentiment rose to 91.1 in February from 89.5 in January
• Industrial sentiment rose to -11.2 vs -13.8
• Consumer sentiment edged up to -23.6 vs -23.9



Eurozone monetary activity dead in the water

Scrape beneath the surface  of the Eurozone money supply data and there is a very sorry tale of economic flat-lining and recession. M3 money supply growth might be expanding at a 3.5% pace, but it is still below the ECB’s 4.5% growth reference target. Eurozone credit growth is contracting at an ever quickening pace. Overall loans to the Eurozone private sector contracted at a 0.9% annual rate in January, down from December’s -0.7%. The underlying credit components reveal a much more worrying picture. Bank loans to the Eurozone consumer sector contracted at a 3% annual pace in January, with credit to the company sector falling at a 2.5% rate year-on-year.

Consumers are really feeling the pain of the slowdown, burdened down by rising unemployment worries and the pinch of all the austerity measures through the Eurozone. The vital life blood of recovery is not coming through from the corporate sector. Banks are simply not lending to businesses in the magnitude that the ECB are hoping for, while weakening economic confidence means companies are not taking up new loans for business expansion. It will send alarming signals to the ECB that despite all its monetary stimulus efforts, the relief is still not getting through to the parts of the recovery that need it most. Eurozone rates need to go lower and stay low for a long while. Monetary expansion needs to feed through to the economic sectors that need it most.

With bank balance sheets still undergoing major repair work, it will be a tough task for the Eurozone authorities putting the monetary stimulus into effect via expansive bank credit policies. The task will be made doubly difficult while ECB monetary policy needs to over-compensate for the effect of Eurozone fiscal austerity. Recession forces look set to extend through 2013.

Falling well short of UK escape velocity

If the markets had any doubts, easy UK monetary policy looks set to stay for a very long while. Japan is already over a decade in to quantitative easing and UK policy dynamics seem to be shifting that way fast. The latest missives from the Bank of England underline that the monetary policy regime will remain easy for a long time to come. Low rates, expansive money supply, and a weak UK pound should remain the cornerstones of excessive lean-to easy policy, especially while the UK government continues to batten down the fiscal hatches, taking money out of the system in the process. It will be up to new BOE governor-elect Carney what new box of monetary tricks will be applied to kick start the UK economy later this year.

The key is the economy and how soon it can reach escape velocity to break free from the gravitational pull of recession. Judging by recent trends, it could take years before the economy begins its escape into stronger growth velocity. Over recent years, the forces of UK de-industrialisation and the spectacular fall from grace by the UK banking sector have ripped a great hole into recovery prospects ahead. The problem with the BOE’s massive monetary mobilisation is critical lack of traction. The UK remains in a classic liquidity trap. Not enough stimulus money is getting through to the real economy as new credit. Meanwhile, those that are in a position to invest and spend are simply holding back in the face of dire economic prospects. Businesses are reluctant to invest in new capital while recession forces grumble around them. UK consumers are up against it too.

The odds are that UK interest rates could flat-line close to zero for the next five years. Apart from energy and government induced supply-side price rises, core UK inflation is dead in the water. Demand pull inflation risks are virtually non-existent too, especially while UK consumers remain under duress. The Bank is well aware of this. The hints from the BOE are that QE will continue to pump-prime more liquidity into the economy. Neither are they averse to more a weaker pound to fast-fuel UK export sector recovery.

The policy of low rates and keeping the economy awash with cheap cash takes a leaf from the US Federal Reserve’s book during the 1980s savings and loans crisis. Back then, aggressive Fed rate cuts steepened the US yield curve, boosting the banking sector’s natural franchise – borrowing short and lending long – and restoring better balance sheet profitability in the process. The BOE should succeed with lower rates and a steeper UK yield curve in exactly the same way. If UK banks are encouraged to lend more money, the economy should get stronger and bank profitability should recover in tandem.

The implications for UK markets are quite clear. Sterling will be going lower, tacitly-endorsed by the BOE. A test of USD1.40 should not be ruled out in the weeks ahead. The forex markets can take a clear hint. UK rates will be nailed to the floor close to zero for many years, while rising inflation expectations will continue to steepen the UK gilt yield curve. The UK’s recent credit downgrade will also play a part there as long term risk premiums lever up in the UK bond yield curve. While King’s ‘put’ continues to fast feed the free lunch on asset buying, how far investors travel along the Capital Market Line will depend on prevailing risk perceptions. If Italian politics manage to settle, irrational exuberance should let rip again. The 2013 equity rally is not over yet, just sidelined while Eurozone event risk sorts itself out.

Italy: This is the end?

It was never going to be one of the Eurozone minnows that could sink the euro. The danger of that was always lurking from one of the bond market behemoths – Italy or Spain. In the last few years, Greece, Ireland, and Portugal have rocked the Eurozone boat to its very core. But this time it could be Italy that takes the euro down with all hands. Italian politics have always been a nightmare and it is no exaggeration to say that this could mark the beginning of the end for the single currency. We could have entered the worst case scenario of ungovernable Italy. With Italy now facing a political deadlock after the election shock, hopes for stable government, committed to on-going fiscal austerity and structural reforms, have been swept aside. Clearly, the major winner is uncertainty with market perceptions left in disarray again.

You have to pity the nation. Clearly voters have had enough of force-fed austerity and rising double-digit unemployment. With the economy already under water for 5 successive quarters of recession and no signs of coming up for air soon, it was no surprise voters would look for an alternative to the mainstream parties. The election turned into a massive protest vote with the anti-establishment 5-Star Movement, clearly the biggest winner, gaining more votes than any other single party. Italy is now in political gridlock. While the pro-reform centre-left looks set to take control in the lower house, there is no clear winner in the upper house. Unless the opposing mainstream parties of the centre left and right are able to bury the hatchet and formulate some sort of governing grand coalition, Italy looks set for a period of political instability and new elections ahead.

During past political crises, when Italy had its own currency the contagion effect abroad could be reasonably well quarantined. But now with Italy forming a key part of the euro, there is major contagion risk ahead for global markets. Whether or not we are facing an Armageddon scenario will be down to Italian parties settling differences and getting the country back on budget track again. But if this is a start of a new order and distressed Eurozone voters saying no to tough times, there will be trouble ahead.

De-convergence trades are the order of the day again. Euro sentiment has been holed below the water-line and Italian bond spreads have gapped up again. This is no storm in a tea-cup but the mark of a deeper sea-change for a while. Over the last 7 months as the ECB has thrown its weight behind Eurozone survival, the Draghi ‘put’ has had a lot of success in settling market nerves. But that process pre-supposed that collectively everyone and everything would fall into line and do their bit. Continuing fiscal austerity, on-going structural reforms and voter acceptance, were all supposed to be part of that process. Those assumptions now appear to be foundering on the rocks of the Italian election. There was always a sense of deck chairs being re-arranged on the Titanic. If the euro is going down, the suction effect on global markets will be fierce.

If this is the start of the slide back down the slippery slope into Eurozone contagion, then the brave new world of the euro is over. The markets can only wonder if time will finally be called by disaffected Eurozone voters. Or whether Germany pips them at the post and decides it has had enough and throws in the towel. Despite the big easy in global monetary reflation, it may be time to go long of tin-hat futures again.

The millstone round Germany's neck

Sound bite: German IFO business rose for fourth successive month in February to 107.4 from January's 104.2

German economic confidence surveys seem to be showing more signs of economic spring, but the economy is still struggling with a massive millstone round its neck. The rest of the beleaguered Eurozone economy. The latest rise in Germany’s IFO business climate index is certainly good news and corroborates the latest ZEW survey’s hints for stronger growth ahead. But the optimism is out of step with what current real evidence and logic tend to suggest. The fourth quarter 0.6% dip in German GDP confirms that the economy has slipped half way back into recession. With so much of German export demand destined to the rest of the Eurozone, it is no surprise that a plunge in exports was the biggest drag on the German economy in the fourth quarter. Self-enforced economic austerity is taking a massive toll on the Eurozone outlook. The economy is under water, deeply in recession and pulling the German lifeboat down with it. This can hardly fail to make its mark on the Bundesbank hawks, who have been a lot more sceptical about the ECB doves’ drive to greater monetary largesse to relieve the situation. Even the normally rock solid German export economy is now starting to show signs of stress in the face of the strong euro. There is going to be a growing clamour throughout the Eurozone for ECB policymakers to take a lot more care over the currency outlook. There is a good chance that the ECB will tacitly be throwing their hats into the ring for the emergent currency war.

The Fed rocks stocks – only temporarily

This is a liquidity driven, risk-on rally, that has plenty of underlying fault-lines which will occasionally trip up sentiment. But the underlying directional pull for stocks and risk assets generally in this cycle is undeniably risk-on now. We are back to bubble economics and the super-accelerant added by the central banks is the propellant that will take this rally back above the upper hemi-sphere in the coming years. The tail risks of the Eurozone and the US fiscal cliff are still there but they have receded considerably in recent weeks. The Fed is going to be the last agent that will want to upset the applecart on the risk-on revival to date. It has plied the markets with more liquidity than anyone else. It wants risk-on. It wants irrational exuberance. It wants four dimensional easing – easy money, easy rates, easy currency and easy fiscal policy. It wants stronger growth and the lower cost of capital to markets is all part of that plan. Strong equity markets and stronger financial wealth perceptions are central to this. If consumers feel wealthier because their stocks go up and house prices start to stabilize, then that is part of the game-plan too. This is no anti-irrational exuberance subterfuge. The Fed is doing its usual job of massaging market expectations and getting the debate into the wide open about the means of tapering QE off at some stage in the future. It is not going to happen tomorrow, next week or next month. It may not even happen next year. The strategy remains intact. At some stage the Fed’s La Grande Bouffe appetite for Treasuries and low rates will eventually pop, but not yet. That will only happen when US unemployment sustains a break below 6.5% and inflation holds above 2.5%. We still have a two year event horizon on that eventuality. In the meantime, the market is long of liquidity and remains under-nourished in terms of risk appetite. So while the table remains filled, feast on.

A farewell to AAA

Get used to it as the UK will be bounced from that ever-shrinking ,exclusive club of triple-A nations before very long. The UK’s public sector finances were already a train wreck before the Great Crash II began in earnest in 2008. No matter how much tape and plaster UK Chancellor George Osborne applies at next month’s Budget, it is only a matter of time before the ratings agencies deliver the coup de grace. Britain’s cherished AAA status will be a thing of the past and it could stay that way for a long time.

January’s bumper £11bn surplus did little to mask the dire state of the nation’s public sector finances.  UK fiscal attrition is supposed to be restoring better repair to the country’s finances, but the consequence is putting UK recovery prospects back on the road to ruin. Double dip UK recession already seems to have turned into triple trip downturn, judging by the 0.3% fourth quarter drop in output. The deficit is already running 1.6% higher than where it stood a year ago. The downturn is wrecking revenue returns. The 7% of GDP deficit target set for this year is set to be breached. This is not the only anathema for the ratings agencies. It is the longer lasting damage that government austerity poses for growth prospects that is unsettling Moody’s, S&P and Fitch. Going forwards without sustainable growth it will be even harder for the UK to drag itself out of the fiscal mire. The UK seems set on a self-sustaining downward spiral. Japan has been stuck in this rut for the last decade.

Does a downgrade matter to the UK? Apart from the obvious knock to national pride, the damage is probably more cosmetic than collateral. Japan lost its Triple-A status as far back as 1998, and other cuts followed. Yet Japan’s bond market remains functioning and rates and yields are ultra low. And the yen maintains reserve currency status despite massively worse fiscal fundamentals than the UK. A drop from triple-A status may mean some extra upward pressure on UK gilt yields, but nothing too dramatic. Demand for UK government debt remains pretty strong. The bond market still remains in the grip of a 30-year mega bull run and the positive fundamentals still remain intact. Thirty-year UK gilt yields have only just pierced the 3% threshold and remain significantly below the 12% yields knocked up at the height of the UK ERM crisis in the early 1990s.

Of course low UK bond yields are a major by-product of the Bank of England’s quantitative easing policies, as gilts have been snapped up in the central bank’s bond-buying spree. They now own over a quarter of the UK gilt market. The BOE are hardly likely to blanche at a UK rating cuts. While the QE programme remains in place, they remain firmly locked into gilts for the duration. That is unlikely to change for a long while judging by the BOE’s latest policy missives. The BOE’s continuing support for gilts looks ironclad.

Overseas investors do not seem too dismayed either. UK government debt remains a great safe haven diversification bet from Eurozone event risk. And the recent plunge in the pound makes UK debt even cheaper on a relative value basis for global bond investors looking for currency plays.

Domestic institutional demand remains a strong force as ever.  It is not just positive economic fundamentals – low growth, low inflation, and low interest rates. But it is also because UK institutional demand for gilts, especially for longer dated maturities, remains strong for balance sheet management purposes. UK pension funds and life assurance companies have a natural appetite for longer term gilts to match off longer term liabilities (policy commitments). Super long gilts tend to get swept up and put in the bottom drawer for maturation. A debt downgrade would have little impact on this structural appetite.

Of course, Osborne could always change tack and throw caution to the wind and go for growth blowing his deficit targets out of the water. It is probably too late for that now as he is more likely to be damned either way in the ratings agencies eyes. They seem to scent blood and a feeding frenzy must ensue. In any case, this Chancellor is unlikely to change his spots.

Eurozone still stuck in recession

Sound bites: Eurozone PMIs highlight growing divergence strains

The Eurozone purchasing managers data highlight growing divergence strains within the Eurozone. The Eurozone economy as a whole is showing deeper cracks in the recovery outlook, but with deeply negative growth tendencies in most of troubled Eurozone nations, only being offset by continuing expansion in Germany. This is mostly export-led, but can hardly be relied on as a continuing safety net since so much of German external demand draws from the rest of the Eurozone. The slowdown evident in Asian markets also underlines further risks ahead for the German export sector. If there is a key message for the ECB, they cannot afford to ignore the euro’s recent strength for too much longer. Turning a blind eye to a strong euro hardly helps, while fears of global currency war rumble in the background. The weak US dollar and UK pound will be bringing much needed impetus to their respective home economies. But the stronger euro will become a bigger burden even for German exporters in the long run.  With the Fed Reserve already starting to hint that excessive QE may have to be curtailed sooner rather than later, it may help take some immediate steam out of the euro. But there may be a good case for the ECB to lean with the wind and start hinting at the economic benefits of a more competitive euro. The bias for ECB monetary policy should remain on an easier footing.

Highlights:

• Euro zone business slump worsens unexpectedly in Feb
• Flash euro zone services PMI sinks to 47.3 vs Jan's 48.6
• Flash euro zone manufacturing PMI eases to 47.8 from 47.9
• French activity shrinks at fastest pace since early 2009
• PMIs point to 0.2-0.3 pct contraction

Eurozone consumers under water

Sound bites: Eurozone economic confidence remains under water at -23.6 in February

Eurozone consumer confidence remains the weakest link in the recovery cycle. Burdened down by extreme fiscal austerity, heavily squeezed real incomes, severe debt deflation, and rising unemployment, it is no surprise that Eurozone consumer confidence is on the ropes and domestic demand is reeling so badly. Recovery in the Eurozone consumer sector will be key for sustainable recovery going forwards, but there seems little chance of that in the near future until Eurozone austerity and the climate of economic fear end. The Eurozone recession looks set to persist for a long while, adding pressure on the ECB to lighten monetary conditions even further. Eurozone rates need to go lower, more monetary expansion is required and the euro needs to be eased lower. The ECB should be taking leafs out of the Fed and BOE’s policy books.

UK economy - pushing hard on the monetary rubber

The old monetary adage used to be policy pulling on a rubber band to get the economy working. Pull so hard and the brick would eventually snap forward and hit you in the face. Nowadays the policy adage in Britain's dour economic landscape is pushing hard on the monetary rubber. The brick stubbornly refuses to budge despite best efforts. Given the current economic backdrop of the UK about to slip from double dip to triple trip recession, it may be a surprise to see UK employment growth defying economic gravity and moving higher. But it is no surprise to see the thin end of the wedge for more monetary easing emerging at the Bank of England.

The BOE's monetary policy committee revealed a surprise 6-3 split on more quantitative easing earlier this month, reviving the prospect that the central bank might restart its bond buying programme again to help kick-start the economy. The MPC minutes are very dovish, especially since Governor Mervyn King is in the vanguard calling for more QE to the tune of another £25bn extra stimulus pumped into the economy. What's more there was discussion of other policy options being considered. This included cutting rates again and reducing the marginal rate of remuneration on banks' reserves, in order to help force feed more liquidity more into the economy via extra bank lending. Faint chance of that with UK banks hoarding so much of the BOE's liquidity largesse for their own precautionary purposes.

King's new dovishness is a classic case of the tail wagging the dog and the rest of the MPC should eventually fall into line. The call to monetary arms is bound to be taken up in a bigger way by BOE Governor incumbent Carney when he takes charge in July. His credentials for further measures are already on the table. Bearing this in mind, it is no surprise that sterling continues to take a  steady pounding (down 0.7% today running close to USD1.53). A concerted break below USD1.50 looks on the cards fairly soon and outlier forecasts for a test down to USD1.30 hardly seem that outlandish any more. This is a good thing as far as the BOE are concerned as a much weaker pound is a well proven way of boosting the UK's export industries. The Bank have hardly been a thin red line in the pound's defence and the whispering campaign for a more competitive exchange rate has been pretty clear to the markets.

The problem remains more deeply rooted in the domestic economy. While much welcomed, the 12,500 drop in UK unemployment in January will not hold much water for the BOE. Not when UK wage growth remains so weak at 1.3% yoy, well below the rate rate of inflation. Real incomes are being squeezed hard and it is no surprise to see the disaster zone unfolding in the UK High Street. The Bank of England may push and pull on the monetary rubber till the cows come home, but it will not change the outlook substantively while the government continues to harry the economy with aggressive fiscal austerity.

The US  is already emerging from the economic murk thanks to 4-dimensional stimulus - easy rates, easy money, easy dollar exchange rate and easy fiscal policy. The UK has some hope with 3D easing right now - easy rates, money and currency - but it is up to Chancellor Osborne in next month's budget to have that Damascene moment of clearer vision of economic revivalism. Is that 4th dimension possible? The words 'as much chance' and 'hell freezing over' sadly spring to mind.

Armageddon in 5 days?

Not very encouraged about Italy frankly. Politics remain the age-old problem in Italy. The election could hold the whip hand for major problems ahead, not just for Italy, but for Eurozone and global financial stability. Italy is the Godzilla of event risk for the Eurozone. The bond market is a behemoth. The ECB have done as much as they can to prop up confidence for bond market investors, but any wobble in confidence could bring the whole house of cards crashing down around the market’s ears. Quite frankly, the EU, IMF and the ECB do not have the resources to keep this monster intact if the political situation starts to fragment, or the market begins to lose faith in the government ever being able to stabilise the debt situation. What we need to see is a return of a non-partisan, technocratic government like we had under Giuliano Amato in the early 1990s to get the country back into better budgetary shape. The problem with that will be years of enforced economic austerity. It is a corset that the electorate refuses to wear any more. With or with economic austerity the economic still looks doomed to years of sub-par growth and continuing recession risk. It is just a matter of political degree. The only reason the key 10-year Italy-German yield spread has compressed so aggressively in the last six months is the belief that the ECB will be the lender of last resort to Italy in a crisis and  that the tail risk of Eurozone risk has finally receded. If Italy goes pear shaped, it will the beginning of the endgame for the Eurozone. It is not over yet

German ZEW economic confidence rises

Sound bites: German ZEW optimism building momentum. Index surges to 48.2 in February from January's 35

Hope springs eternal and German business optimism for stronger recovery continues to build momentum. Tail risks for Eurozone implosion have clearly receded, but there is still a lot of dead-weight pulling down the potential for German recovery ahead. German export recovery is still inextricably bound in to the outlook for Eurozone domestic demand. Continuing recession in the troubled Eurozone economies and flat-lining elsewhere in the single currency zone remain huge risks for sustainable growth over the future. It is still a tale of two economies. Germany leading the way higher in terms of recovering confidence and a very slow road back to health elsewhere. The message for the ECB is on-going patience and over-easy policy for a long while. The trouble is that monetary conditions are starting to tighten with the stronger euro and the pay-back of liquidity by Eurozone banks. Eurozone rates will probably need to go lower and stay low for a very long while. Bundesbank strictures will have to be ignored.