The equity markets rallied significant as better than expected industrial production and robust producer prices drove investors into riskier assets. U.S. manufacturers increased their output in July as the auto sector continued to recover, pushing overall industrial production up 1%. Although housing starts in the US did not reach expectations, investors focused on the manufacturing side of the ledger. The S&P 500 Index increased by 12 points to close at 1092.
The sense that the strong Q2 growth and export numbers from Germany in recent days are just telling the story of a peak in activity will be reinforced by today’s ZEW survey, which showed confidence among investors about Germany’s economic prospects falling to a lower than expected 16-month low. The index of economic sentiment – from a survey asking for predictions of conditions in six months time – fell to 14 (was expected to fall to 20) from 21.2 in July. The index measuring the current situation was far more buoyant, as one would expect, jumping to 44.3 (24 expected) from 14.6 in July. Markets are looking at the bright side of things today after Monday’s positive turn in sentiment and so equity markets are up, bond markets are down, and the euro continues its consolidative rally against the dollar. ZEW said its economic expectations index fell to 14.0 in August, from 21.2 points in July. The outcome was well below economists’ forecasts of an unchanged reading of 21.2 points.
Moody’s released a pretty supportive report regarding Aaa-rated sovereigns, concluding that France, Germany, UK, and US face fiscal challenges but retain their stable outlooks. The agency said that these are well-positioned to retain their Aaa ratings based on a forward-looking assessment of debt dynamics and debt affordability. However, it warned that due to the fiscal challenges ahead, the so-called “distance-to-downgrade” has been further reduced for these four countries, implying less of a cushion should things head south. Moody’s noted that the Europeans are now pursuing deficit reduction measures but that the US remains in the early stages of this process. Lastly, it noted that Spain is not in this group and is reflected by the fact that it put its Aaa rating on review for possible downgrade on June 30.