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Article / 30 May 2016 at 5:17 GMT

3 Numbers: Eurozone business and consumer sentiment edges higher

Blogger / MoreLiver's Daily
  • Germany's Wolfgang Schaeuble will speak on sustainable public finances
  • His hardline fiscal policy views will make his speech worth watching
  • Europe's economic sentiment indicators for May remain high
  • Germany's inflation rate is edging slightly higher, but still close to zero

By Juhani Huopainen

Today’s trading day will be seriously hampered by holidays in the UK and US. Despite the holidays, the rest of the world is open and today’s calendar is interesting.

Last night’s speech by Federal Reserve Bank of St Louis president James Bullard, the second-guessing of the Fed’s coming interest rate hikes, and the Bank of Japan’s next move will be the main themes this week, as not much is expected from this week’s meeting of the European Central Bank.

German Finance Minister speaks (0900 GMT). Germany’s finance minister Wolfgang Schaeuble will be speaking at a conference in Berlin on sustainable public finances.  Ifo Institute president Clemens Fuest will be taking part as well.

Schaeuble is well-known for his hardline views on fiscal and monetary policy. This is inconvenient for the Eurozone’s attempts to reflate and get the growth going, as monetary policy at the zero negative rates forces central banks to resort to unconventional policies like negative rates and asset purchases.

Asset purchases are by definition risk and debt mutualisation. Schaeuble’s view is that such measures inhibit reforms and austerity and are an invitation to ignore national budget deficits.
This creates a Catch-22 situation for Europe. If fiscal and monetary policy are bad and prohibited, and austerity is dead on a theoretical and practical level, only “reforms” are left as viable policy options.

Such measures are politically very difficult to implement, and usually a crisis is required before they are brought in. I am not sure what Schaeuble believes in doing, but due to his vast influence in German politics and Germany’s influence in Europe, this speech is worth watching.

Euro area May Business and Consumer Survey (0900 GMT). Euro area’s Economic Sentiment Index is expected to have risen to 104.5 in May – a clear improvement from 103.9 in April. If the consensus forecast is right, it would be the second consecutive rising month since the weak start of the year.

ESI long
Chart source: Saxo Bank

The first quarter’s gross domestic production growth rate in Europe was surprisingly strong, and the second quarter’s growth rate is widely expected to be slower.

It does sound like a contradiction, but perhaps the globally weak first quarter was overcome by higher public spending due to the migrant crisis. Now that several risk factors from Greece to the global outlook are on the decline, economic sentiment is improving.


Chart source: Saxo Bank

Looking at the country-specific data, Italy’s index jumped in April, while Spain and France have been disappointing in the past few months.

Dolce vita: Consumer and business sentiment is up in Italy and most of the rest of Europe. Photo: iStock

Spain is hurt by difficulties in forming a functioning government. Meanwhile France has a government that has recently learned to function, but it faces strong opposition to planned labour reforms.

ESI countries
Source: Saxo Bank

Without Italy’s jump, the euro area sentiment index would not have improved notably.

If the jump is not sustained, the overall outlook for the Eurozone would probably fall back in line with what the Markit’s Purchasing Manager Index is suggesting.

The May flash composite PMI fell to a 16-month low, and while it remained well above the zero-growth 50-line at 52.9. The data can be viewed and downloaded here.

Germany May Flash Consumer Price Index (1200 GMT). After falling for two months, the consumer price index is expected to have increased 0.3% from a month ago. That would increase the CPI’s annual change to 0.1% from the previous month’s -0.1%.

German CPI
Source: Saxo Bank

The EU-harmonised index of consumer prices (HICP) is similarly expected to show a slight improvement, as the year-over-year change is expected to climb from the April’s negative 0.3%  to -0.1%.

The improvement in headline inflation is immaterial, as oil prices have rallied since mid-February, but this has not managed to increase headline inflation.

Of course, the higher oil price is inflationary. Its effect comes after a delay rather than immediately. But note how the inflation rate was already trending lower before oil prices collapsed. I assume that even with a rising oil price, inflation will remain subdued.

The euro area flash inflation report for May and the M3 monetary aggregate and lending data for April will be published tomorrow – and the European Central Bank’s policy meeting concludes on Thursday.

-- Edited by Adam Courtenay

Juhani Huopainen is a blogger and a macro analyst at More Liver’s Daily. If you would like an email notice each time Max posts a trade, then click here to follow him.


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