Global Daily – Continued US-Eurozone macro divergence

by: Aline Schuiling , Bill Diviney

Euro Macro: German sentiment drops on worries about Italy and the automobile sector – Germany’s ZEW economic sentiment fell by almost 8 points in June (to -16.1), reaching its lowest level since September 2012. The survey gauges the expectations of economists and analysts about the German economy during the next six months (balance of improve and get worse). The details of the report show that the drop in June was predominantly driven by collapsing expectations about Italy’s economy (-32 points to -48). The ZEW sentiment indicator tends to move closely in sync with sentiment in financial markets. Indeed, the survey was conducted from 28 May-11 June, during the period when Italy’s equity and government bond markets sold off on the back of worries about the new populist government’s fiscal plans and stance towards Europe. As financial market sentiment towards Italy has stabilised recently after the new government emphasized that it had no intentions of leaving the monetary union, we think that this part of the ZEW survey will stabilise as well in the coming month. That said worries about Italy could rise again after this summer, when the Italian government will present its 2019 Budget to the European Commission. Besides the expectations about Italy, the details of the ZEW report also show that the expectations about the automobile sector dropped the most of all sectors (-27 points to -36). This seems related to fears for the US imposing tariffs on European car imports, and these fears may well linger. (Aline Schuiling)

US Macro: Small business confidence hits second highest on record – In contrast to the weaker numbers from the eurozone, US business confidence remains remarkably strong. Following a pickup in the ISM Manufacturing PMI earlier in the month, the NFIB Small Business index hit a new post-crisis high of 107.8 in May – the second-highest reading in the survey’s 45 year history, and only 0.2 points below the all-time high of 108.0, reached in September 1983. The strength in the index was driven by reports of compensation increases and views about business expansion, which both hit all-time highs. At the same time as reporting higher worker compensation, concerns about labour quality were also the second highest ever, consistent with what the low unemployment rate is telling us, but puzzlingly inconsistent with the lack of a significant acceleration in wage growth. Meanwhile, the Fed’s rate hikes do not appear to be dampening credit demand as yet, with 43% of respondents saying they were not interested in a loan – the lowest since April 2007, and something the NFIB believes is a sign that borrowers are coming off the side-lines following years of tepid credit demand in the aftermath of the recession. All told, the survey suggests the US has so far been relatively immune to the weaker external backdrop, likely a reflection of the significant fiscal stimulus coming on stream, and the fact that the US is a less export-dependent economy. (Bill Diviney)