EU Commission Indices Show Mixed Trends

The overall EU economic sentiment indicator from the EU Commission ticked higher to 105.7 in June from 105.6 in May. Meanwhile the EMU index edged lower to 104.4 in June from 104.6 in May.

Coming attractions...

With the U.K. adoption of the Brexit strategy, the EU index is about to undergo a radical change as the U.K. will be extracted from the EU reading. The EMU readings will remain unaffected. In the future, the differences between the EU and the EMU will get much smaller since the combined GDP of the EU's non-EMU members will become much smaller relative to the EMU members of the EU once the U.K. leaves. We have no idea if the EU Commission will issue a new EU series historically to exclude the U.K. thereby making the index a better gauge of the EU's upcoming membership.

Sector changes month-to-month in June

The table shows that the EU industrial gauge improved in June to -2.3 from -3.4 in May; this is its best reading since May 2014. Consumer confidence slipped in June to -5.8 from -5.7. Retailing fell relatively sharply, dropping to 1.6 in June from 3.0 in May. Retailing was last weaker in February 2015. The construction sector diffusion index eroded by two points in June to -15 from -13; it is back to its February 2016 level. Services backed off to a 9.3 reading from May's 10.0, still above their March level of 9.1.

Sector standings

The standings place each sector in its respective historic queue of data expressing its current level as a percentile positioning within its historic cluster of data. These metrics provide a broader perspective on what the current index level signals. Viewed this way the overall EU standing is in its 65th percentile and the EMU standing is in its 61st percentile. EU retailing stands the highest, despite its recent backtracking in the 85th percentile of its historic queue. Consumer confidence is next at its 80th percentile. Services stand in their 65th percentile. The industrial sector is in its 63rd percentile. Construction stands in its 58th percentile. The 80th percentile standings are relatively strong, the remaining readings are moderate. All are above their respective midpoints. The midpoint reading occurs at a rank standing of 50%.

Country by Country

Among EMU members, Malta and Cyprus alone have standings in the top 20% of their respective queues of data (80% or higher). Belgium has a high 77th percentile standing; Luxembourg has a mid-70s standing, while Germany and Spain each have low 70th percentile standings. Only Greece and Slovakia have standings in the lower 30th percentile of their historic data queues. France is below its midpoint with a 48th percentile standing; also below their respective midpoints are Austria, Finland, and Estonia. There is nether much absolute strength or weakness in the euro area as readings are coming together in a more moderate region.

Monthly changes by country

In June, three countries saw their assessments weaken, an improvement from May when ten weakened. There were large gains of 4% or more this month in Belgium and Malta, smaller countries, of course. The Netherlands posted a 2% gain, Luxembourg a 1.6% rise, Finland a 1.2% gain with Spain and Portugal showing monthly increases a bit short of 1%. Italy logged a 3.3% drop and France posted a 1.7% decline; Cyprus also fell by over 1% on the month. The decline in two of the three largest EMU member countries was enough to swamp all the other increases and take the overall EMU index lower. In the wake of the Brexit vote, Italy, Spain and Portugal are going to be watched more closely.

Sector signals

Consumer confidence is a leading sector. It already seems to have peaked in this cycle and its recent movements are in a lower trajectory. Services remain in a similar configuration with the industrial sector at lower diffusion values and mostly flat. In short, momentum is not a positive for Europe. Monetary policy is already going full bore.

The Draghi Plea

Yesterday at a European-wide summit, ECB President Mario Draghi sounded a bit shrill in asking for countries to pay attention to the effect their policies have beyond their borders. Well, which is it? Is policy being coordinated or is each country running policy in its own best interests? You can't have it both ways. And, yes, different nations are in relatively different positions in their respective business cycles and that does point to policy divergences which will need to be managed or taken into accounted. We get the sense of Draghi feeling helpless and asking others to not make his plight worse. Nonetheless, equity markets rebounded on the day and no one seemed to take Draghi's message of desperation much to heart. Was that a mistake?