Euro-Area Slips in Yet Another Month

The EU indices show another month of weakness as the overall sentiment index dropped for both EU and EMU as a run of weakness enveloped most of the large member countries. Spain is the exception and Spain alone is up to its cycle peak reading in June.

In June across the EU the industrial sector indicator slipped by one point while consumer confidence remained flat at a -11 reading. Retailing gained one point to -2 from -3 but continued to turn out negative net readings. Construction remains ossified at a -26 reading weak and at the same mark for three-months running. The services sector made the largest slip of the month shedding two points to stand at a +6 reading in June down from +8 in May.

The levels of these readings remain weak for the most part. We offer two perspectives on the relative strength of sectors. One is the percentile range reading which places each sector's/county's level in a high-low range of values. The other is a bit more comprehensive as it evaluates the current level against all observations assigning a rank to the current observation in the historic queue and then expressing that as a percentile. As a rule the range percentiles tend to be higher (see table) at this point in the cycle than the rank or queue percentiles. We will tell the story of this month's readings from the queue percentiles.

For perspective, the EU as a whole has its overall economic sentiment gauge at the 76th range percentile while also standing at the 64th percentile in its queue.

As to the EU sectors, the strongest queue standing is still for the industrial sector at the 87th percentile followed by retailing in the 77th percentile and consumer confidence in its 55th percentile. That's as good as it gets. After that construction and services hover below the 40th percentile of their respective ranges. Service is still the key jobs sector for Europe and it is doing badly.

As to country level standings, the results are more disparate and extreme. The EMU, like the EU, stands in the 64th percentile of its range- not a very high standing for the ECB to be considering a second rate hike, we might point out. But Germany stands in the 93rd percentile of its range. This is why we say that the ECB has decided to make monetary policy for Germany and not for the Zone.

For the rest of the zone the queue percentile standings are a series of mostly grim readings. France tops the list of the rest at the 68th percentile, after that it is Italy (49%), Spain (30%) and Portugal (8%) and Greece (1%). For much of the Euro-Area and EU the countries have not expanded very far in recovery and have not lifted their main sector metrics back to even normal levels, let alone strong levels.

With this month's EU index that becomes clear and the ECB's decision to exercise 'strong vigilance' appears all the odder. Part of that may be Trichet trying to cement his legacy and to hand over to Mario Draghi, his successor, a bank that is clearly not behind the curve. Yet, all the ECB bond holdings may prove to be a bigger nightmare for Draghi than where Trichet leaves the overnight interest rate. To be sure, many challenges lie ahead for the Zone and for the ECB.

EU Sectors and Country Level Overall Sentiment EU Jun
11 May
11 Apr
11 Mar
11 %ile Rank Max Min Range Mean By Q
Rank% Overall Index 104.4 105.4 105.1 107.4 76.4 91 116 67 49 100 64.0% Indus. 3 4 5 7 89.4 33 8 -39 47 -7 87.0% Cons. Confid -11 -11 -14 -13 61.8 112 2 -32 34 -11 55.7% Retail -2 -3 -4 1 71.4 56 8 -27 35 -6 77.9% Const. -26 -26 -26 -27 35.6 153 3 -42 45 -20 39.5% Services 6 8 7 10 57.6 109 34 -32 66 11 38.4%   % M/M Jun
11 Based on
Level Level   EMU -0.4% -0.6% -1.1% 105.1 74.0 89 118 70 48 100 64.8% Germany -0.5% -0.1% -0.8% 114.5 88.3 17 120 73 47 100 93.3% France -0.8% -1.5% -1.1% 106.3 74.2 81 117 75 42 100 68.0% Italy 1.8% -2.7% -1.0% 99.3 55.7 129 121 73 48 100 49.0% Spain 2.8% 3.4% -1.0% 95.7 54.8 177 115 72 43 100 30.0% Greece -5.4% -0.3% -5.4% 70.0 5.3 250 120 67 53 99 1.2% Portugal -0.7% -2.2% -1.8% 84.6 33.0 231 117 69 48 100 8.7% Memo:UK -2.2% 2.6% -4.9% 99.9 69.2 154 116 64 51 100 39.1% All since June 1990 253 -Count Services: 177 -Count   Sentiment is an index, sector readings are net balance diffusion measures