The divergence between U.S. and European data continues.
The ZEW survey of German investor sentiment hit a major snag in October, sinking into negative territory for the first time in almost two years. Investor confidence has clearly been undermined by weak economic performance in the euro area. The results of the ECB’s bank stress tests, which will be released at the end of the month, could potentially remove one headwind that has been holding back risk-taking in the euro area. But it is unclear whether that will be enough to put a floor under sentiment.
Meanwhile, in the U.S., economic performance is stable. The NFIB survey showed that small business sentiment is holding up. The “good time to expand” index has hit a post-2007 high, although the employment-related components were slightly weaker. All told, there are few signs that problems outside of the U.S. are inhibiting economic growth domestically.
Our view is that global growth dynamics will support the dollar bulls. Sentiment is clearly stretched, but the de-synchronization of growth between the U.S. and elsewhere appears primed to last for at least a few more months. The latter should keep a solid floor under the dollar for now.