German IFO May Take Shine off Europe Debt Deal

German IFO expected to slip further after recent sovereign debt uncertainty, as euro boosted by EU summit, US dollar slides as debt ceiling talks continue to weigh, Bank of Canada CPI

After the excitement of the last 24 hours which has seen equity market and the single currency surge, matters return to the matter of economic data. If yesterdays PMI data is anything to go by things dont augur well with Julys PMI data for Germany and the Euro zone slipping back sharply with euro zone PMI only barely managing to make it into expansionary territory at 50.4. Todays German July IFO is likely to show the same weakness given the recent turmoil inside Europe with the expectations index set to 105, from 106.3, while the current assessment is expected to slip to 122.3 from 123.3.

Given the market relief after yesterdays announcement of a new bailout package, it would appear that EU leaders have bought some much needed time for the single currency, The apparent acquiescence of the ECB in allowing a restructuring, and the Germans appearing to cross their red lines with respect to allowing the EFSFs functions to be broadened had to be done, however obstacles still remain. The problem is that the majority of the German population may have a different view and yesterdays events and there is also the fact that the changes to the EFSF will have to be ratified by all 27 member countries and their respective parliaments. There is also a concern that the EFSF is nowhere near big enough at 440bn if contagion hits Italy and Spain, which means to be effective it needs at least tripling in size. It is also worth noting that all of the 440bn may not be available as that sum includes Italy and/or Spains contribution, and as such could not be called upon.

The US dollar has been the main victim of this move back into risk as the debt ceiling tribulations rumble on. With Standard and Poors stating that a ratings downgrade was pretty much a 50/50 each way bet, whatever the outcome, the US dollar index has taken a drubbing, breaking through trend line support at 74.60 from the May lows at 72.70.

Speculation that a deal is close hasnt done anything to assuage concerns that time is running out, and the admission by FOMC member Charles Plosser that the Fed was making contingency plans in the event of default didnt exactly help allay fears.

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Bank of Canada CPI for June is expected to slip back slightly, probably as a result of the lower oil prices brought about by the IEA intervention last month.