European Macro: European Sentiment Indicator (ESI) March 2017

Europe Macro: ESI March 2017

As I talked about in my post about USA PMI (here) there is this debate going on about hard data vs soft data. Some people suggest the last rally in the markets was because of the expectation of a stronger economy. Some suggest it was just a “trump rally” that has no real support.

Now I’d like to analyze the European Sentiment Indicator (from now on ESI), I want to understand how is the economy doing at my side of the Atlantic sea. The ESI is an aggregate indicator created by the EU that works similar to PMI and NMI but it includes all the business sectors, industrials, services, retail, construction, consumer confidence, etc.

So overall if ESI shows higher readings we should expect the economy to get better in the following months. Obviously then there are different countries and different countries, but overall at an EU level, we should see higher levels of growth that before. And if we see ESI decreasing we should see lower levels of growth.

I do not believe in point predictions so I won’t walk that path. I don’t know if the economy will grow at 2.4% or 3.5% rate. But I don’t care as I don’t need it to build a framework and a view of the economy. What is important is the dynamics and direction of the economy.

If the economy grows faster than expected then business will probably beat expectations and therefore we should expect the markets to go up. How much does will the economy grow, how much will business beat expectations or go up? That’s impossible to know so I won’t even try. But what we can do is to be exposed to the “right side”.

So now let’s check the ESI to try to understand what’s been going on, what we can expect and what should be our view.

ESI March 2017.png

So what we see is an increase in ESI during the second half of 2016. Which is consistent with markets rally.  Now the indicator is flattening but still high and growing, so we should believe that the economy will stay strong. Therefore we should have a bullish view on the economy of the European Union. But does this affect every country? Well, let’s analyze the different ESI for the different countries in the last year.

ESI chart march 2017.png

The chart shows the major economies of the EU and its readings for the ESI indicator. As you can see most of them are doing much better now than they were doing a year ago. Except for Belgium, Italy and perhaps Spain, all of them look very positive.

In conclusion, ESI data supports the bullish story for the EU markets. Which with US data help to build a bullish view of developed markets for the next months. As always we should keep an eye on how the data evolves and remember one indicator is not enough to draw a conclusion. But this looks more positive than negative so I believe the “Trump rally theory” keeps losing strength.

Nuño Pérez del Barrio
Twitter: @nuopb

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