Today, another decline was registered in the Ifo index, which is the most widely watched German economic indicator. As a result, the Ifo now stands at 92.9 points, down from 94.8 points last month, whereas consensus had been looking for a reading of 94.1. The assessment of the current situation was also less positive. In this regard, the survey result was 99.8, down from the August reading of 103.2. Expectations for the coming six months are also looking less rosy, even though the decline from 87 points to the current level of 86.5 was not that pronounced.

 

Looking at the individual segments of the economy which are contained in the index, it is clear that declines were mainly registered in the field of production.

 

Market reaction: The European bond market was only temporarily moved, and EUR/USD did not budge in the wake of this publication.

 

Assessment/outlook: The worsening mood in the German economy is now also reflected by other indicators than the Ifo as well. The signals coming from the Ifo and the other leading economic indicators seem to underline our expectations that economic activity will be extremely weak in the coming one or two quarters. Indeed, we see a significant risk of a recession in Germany and in the euro area as a whole.

 

Recommendation: In light of the economy drifting towards or into a recession and inflation on the decline, we are optimistic with regard to the prospects for the bond markets. By year-end and in Q1 2009, we expect yield levels to be considerably lower. Over the short term, however, the bond markets will continue to be dominated by the newsflow on the US rescue plan for the financial sector. Accordingly, our short-term recommendation is still neutral, and we stick with our buy recommendation for the medium to long term.