Macro Weekly – A weak week for the eurozone

by: Han de Jong

  • Range of eurozone confidence indicators show weakness in February…
  • …but it is too little to get concerned over
  • Korean exports affected by Chinese New Year.
  • US indicators looking good.
180223-Macro-Weekly.pdf (108 KB)

Last year was characterised by strengthening global growth and lower than expected inflation. It proved an excellent combination for markets for risky assets. More recently, disappointing news on US inflation has caused financial markets to reassess the outlook. Recent days have seen some cracks appearing in the eurozone growth story. What’s next?

A sharp drop in Ifo expectations

The authoritative German Ifo index of business confidence fell from 117.6 in January to 115.4 in February. That is a big drop, even bearing in mind that the January reading was the highest in decades. Of the two main underlying components, expectations fell back significantly: 105.4 versus 108.3 previously. It was the third consecutive monthly drop of the expectations-component and it was the lowest reading since April this year.

The Markit PMIs for the eurozone as a whole were also weaker in February, confirming the weaker Ifo index. Here, too, the decline in February was from an exceptionally high level, but still. The ZEW survey also showed weakening in February, both for Germany as well as the eurozone as a whole, as did the data on French business confidence of the French statistics office, INSEE. The odd one out was the index of business confidence in Belgium, which inched a little higher in February.

Eurozone consumer confidence was also a little weaker in February, though from the highest reading since the turn of the century.

Not worried

The question is whether or not we should worry. I don’t think so, at least for now. First, business confidence indices cannot rise forever. Second, the confidence indices were at or near record level and even at slightly lower levels they still indicate healthy overall growth. Third, I cannot see what should have caused a material slowing of eurozone growth. The only reasonable suspects are the appreciation of the euro and a slowing of world trade growth. While the currency has become more expensive, I don’t think that there has been enough appreciation to cause a significant slowdown. As for world trade growth, that does not appear to be growing more slowly as far as I can measure.

So although there is consistency in the various confidence indices, I still think this is most likely noise. The stock market wobble early in the month and perhaps Chinese New Year, falling in February this year against late January last year may have played a role.

Korean exports hit by Chinese New Year

Weakness was also seen in the export data released by South Korea. Exports were down 3.9% yoy during the first 20 days of February after growing 9.2% in January. Chinese New Year is undoubtedly playing havoc with these numbers. So we will have to wait and see what happens in March to get a clearer picture of the trend.

US data stronger

US data was clearly better. The Markit PMI for manufacturing moved up from 55.5 in January to 55.9 in February, as did the services sector confidence index (55.9, up from 53.3)

Last, the US leading indicator has not attracted much attention in recent years, but it remains an excellent gauge for economic growth with a small lead time. The index rose 1.0% mom in January and the yoy growth rate accelerated to 6.2%, the highest since 2014. It suggests that growth momentum in the US is still on the rise.

Fed minutes

The minutes of the 31 January Fed Federal Open Market Committee were published  last Wednesday. Equity markets did not like them very much. The Fed is getting more comfortable with the recovery and given the stimulus provided through the tax reform and the increase in public spending agreed in the two-year budget deal, the Fed is undoubtedly going to raise rates several times this year. We expect the next rate hike at the FOMC meeting on 21 March. Apart from the rate hike, the March meeting is interesting for several other reasons. First, it is the first meeting with Jerome Powell as chairman. Second, the FOMC members will provide an update of their economic and rate hike projections. At the December meeting, the mean for the expected number of rate hikes this year was three. The question is whether strengthening inflation data and the fiscal stimulus persuade the FOMC to raise their number of their projected number of rate hikes.