Latest data shows German business confidence has firmed up after hitting a 2-1/2 year low, indicating a bottoming out for the economy, although overall data across Europe has been flattish, says Laurent Fransolet, head of European interest-rate strategy at Barclays Plc.
The PMI survey results throughout Europe have been generally better than the actual hard data and even-though it’s too early to talk about Q4 numbers, Germany is likely return to growth in the first quarter of 2013. Other big economies like Italy and Spain are also expected to follow suit and return to growth in the second and third quarter, respectively, Laurent added.
Does this mean we will witness more convergence of growth moving forward?
Unfortunately, there has been some convergence to the bottom already, Laurent noted. There has also been some convergence on other parameters such as current account (deficits), unit labor costs and other bigger imbalances that sowed the seeds of the current crisis a few years ago.
There are still large differences in fiscal deficits between the North and the South while economic growth have varied between 0.2 percent and minus 0.4 percent q/q between the core and the peripheries and that needs to improve, he observed.
Asked if this means value for the European bond market, Laurent said European bond markets have already firmed up since summer after Draghi’s speech in September and yield spreads have been tighter. That trend is expected to continue until the year-end and then a lot will depend on the US fiscal cliff situation rather than the developments in Europe, Laurent noted.
German 10-year bunds are expected to trade in a range-bound manner as capital inflows in safe havens continue though yields have probably bottomed out, Laurent said. If the European Central Bank intervenes in the Spanish bond market and a compromise is reached over the US fiscal cliff, a bigger upward movement of about 20-25 basis points is possible.
However, if US fiscal cliff negotiations go down the wire, 10-year Bunds are likely to rally with yields tumbling, he concluded. You can watch the video here.