Euro Area IP Rebounds with Europe in Turmoil

Euro area industrial production rebounded by a smart 1.1% in April, more than recovering its loss of output in March but still behind its combined February-March loss. IP is still falling on balance over three months, but the six-month and 12-month IP growth rate is locked at 2%. In the quarter-to-date, IP is rising at a 1.5% annual rate.

Manufacturing mirrors this sequence of events with output falling by 1.1% in March then rising by 1.2% in April but with a much deeper February-March drop than an April rebound. Manufacturing output is falling at a 4% pace over three months but relatively steady near growth rates of 2% over six months and 12 months.

Consumer goods output rebounded sharply in April after deeper declines in March and February. Consumer goods output as a result is a falling at an alarming 10.5% annual rate over three months but shows 1% or better growth over six months and 12 months. The rebound of output in April is somewhat reassuring looking ahead. Consumer durables output is being better maintained than for nondurable goods. Durable goods output is still expanding over three months while nondurables output is plunging at a 12.2% annual rate. Although IP data are expressed in `real' terms, the ratcheting of oil prices may have something to do with this volatility for nondurables.

Intermediate and capital goods follow these same trends with declines in March and weakness in February followed by a substantial rise in April. Output for both intermediate and capital goods is falling over three months and rising on earlier horizons. Capital goods continue to carry strong growth rates over six months and 12 months while intermediate goods trends remain moderate and expansionary.

These patterns are suggestive of disruptions at yearend that are being redressed in April as output recovers. Still, trends for output gains are no better than moderate. The ISM data are consistent with such a story except they show less of a rebound in train but are fully consistent with this legacy of past weakness.

The most recent data and surveys are showing a great deal of unrest in the most recent weeks as oil prices, the dollar, Brexit and negative interest rate trends are combining to create a potent cocktail of volatility and unrest. A lot of trends are in play that represent interrelationships and that feed off of one-another and seem to have done so in an adverse environment. Maybe we have to get past the period of Brexit vote before market conditions will settle down- if then. Until that happens, real trends are also going to be at risk. Output trends depend importantly on some of the financial variables, like exchange rates and to some extent stock markets and interest rates. Globally, politics and oil developments have taken on a huge degree of importance.

Brexit is simply the culmination of many forces that have come to bear on Europe and on either the EU or EMU as the rapid changes of recent years as well as adjustment tensions have made these sorts of bundled arrangements difficult to maintain. Everyone saw the advantages of the EU/EMU and few envisioned the kind of pain some members have suffered to stay in. Members can now see firsthand the sort of sacrifice and loss of sovereignty that might be required of continued membership. For the U.K. in particular, there is a lot in play, especially with London as Europe's financial center. The U.K. was able to weather the Scottish referendum. The Scotts had their `day in court' and decided to stay. Will the U.K. do the same with the EU or will there be a very different European future in front of us? It is an important question and it has implications for others that may decide to follow in the U.K.'s footsteps should it decide to go. The U.K. is not simply an `issue'; its decision could be a catalyst and that is the aspect putting markets on edge. There are real world real output ramifications. This is not just a financial market event to be handicapped in some betting forum. There are real world consequences at stake.