INSIGHTS

On January 31, 2012

Germany’s Unemployment Progress

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The daily monitoring of the European sovereign challenge is akin to a game of fiscal twister.  Each spin of the dial (read daily headlines) creates a sense of wonder as to how the next contortion will be executed and a sense of relief when it passes.  Though we continue to read daily news in search of a sense of progress, the finality of the situation is still being kicked down the road in most investors’ minds.  However, we have noted that the large amount of pessimistic expectations often is met with more positive surprises.  We have noted before about the European Central Bank’s “progressive” stance in the midst of disinflationary concerns and progress in the recognition of the severity of the issue as being two points that although subjective in nature, are having a significant impact on the equity markets and the interest rate environment.    


Consider that the German DAX has shown a total return of 9.64% and the Euro Stoxx 50 a return of 4.37% year to date further affirming confidence slowly transpiring from some oversold conditions.


In our opinion, the 2-year benchmarks continue to show stability and a rising confidence that the situation is being properly addressed.

France, Italy and Spain Two Year Government Yields



Source: Bloomberg


This one statistical release should explain some of the frustration with the delay of Germany’s role in endorsing the eventual solution.  Perhaps no chart better shows this than the comparison of the unemployment rate between Germany and the Eurozone.

Unemployment: Eurozone and Germany



Source: Eurostat, Deutche Bundesbank


The German unemployment rate is running at a level that has not been seen in two decades.  However, Germany’s employment progress is not shared by the European Union which now stands at the widest level over the same 20 years.  Considering that Germany accounts for 30% of the European Union’s GDP, one might expect that at some point, Germany’s gains will begin to impact the broader union positively – should they continue to push for continuity of the European Union.


Though we expect some disruptions along the way, (as detailed in our European Syndrome list) the potentially overly pessimistic expectations could lead to surprisingly positive returns – as witnessed in the first month of 2012.


 

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