EMU Indexes Show Common Large Country Behavior- Italy Leads the Shallow Rebound

The monthly EU Commission Index for the European Monetary Union showed slight slippage back to 99.3 in March from 99.6 in February. This compares to 99.7 in January and 97 in December. Obviously, the sense of rebound here reveals a very shallow and slow-taking rebound. The industrial sector had readings of zero for the past two months, weaker than the January reading. Consumer confidence was at -19.2 in March, not much changed from the -19.1 in February, but it's a slight improvement from -22 in December. Retailing slipped on the month with a March value of -1 compared to zero in February and a slight improvement from -3 in December. Construction eased lower with the reading of +1 in March after +2 in February that compares to a +4 reading in December. The services sector slipped on the month to a reading of +9 from +10 in February; February was unchanged from January, but the March reading of +9 was up from a reading of +8 in December.

These comparisons show a very tight clustering of values over the last four months or so; the ranking of the overall European Monetary Union index is at its 46.6 percentile, ranked on data back to 1990.

The industrial sector has a ranking in its 70.5 percentile. Retailing is at its 78th percentile. Construction is at its 85.4 percentile. Services are at their 58.5 percentile. The clear weak reading for the Monetary Union is consumer confidence which has just an 8.6 percentile standing; it has been this weak or weaker only 8.6% of the time back to 1990.

As the data above suggest, there's not much of a rebound building while the various metrics show some improvement relative to their December levels (except for construction). The clear message is that there's not much change in momentum at all and as we can see the rankings on the various metrics remain moderate with construction fading but still having a strong activity score. Retailing is quite solid, and the industrial sector is still firm with its 70.5 percentile standing. The chart at the top shows that the various sectors are rebounding. The Monetary Union metrics are off their mini-cycle lows; however, this is somewhat curious with the European Central Bank raising interest rates with inflation high, a war still cooking in Europe and what could be a nascent banking crisis waiting in the wings. There's been some concern about the onset of recession, but these data instead show a clear persistence and slow slog recovery underway. This certainly raises questions about what's next.

Sector performance across large economies Table 2 provides a look at the four largest economies in the European Monetary Union by sector. They show consistency in the confidence metric that is weak and it's the weakest metric for all large economies. The construction sector is firm-to-strong although it isn't always clearly the strongest sector in every economy. The construction sector along with the industrial sector are the only metrics with readings above their median (above 50%) for each of the four largest EMU members. Italy shows the highest percentile standings among these four countries for each category except for industry where it is slightly edged out by Germany. For industry, Italy has the 66.9 percentile standing, compared to Germany's 67.7% standing. Across the largest economies and including a comparison with the overall monetary union reading, retailing shows the most variability across readings while the industrial sector shows the least variability by quite a long shot.

Country level results/trends The overall EU sentiment index declined in 7 of 18 early reporting countries in March that's the same number as in February; both months show much more deterioration than January when only two countries showed month-to-month declines. Among large countries, only Germany shows backtracking in March while France and Spain showed backtracking in February and all large countries showed month-to-month improvement in January.

The percentile standings of EU sentiment measures across these 18 countries show only 4 with standings above the 50-percentile level which marks the median and data back to 1990. The country with the strongest reading is Malta with an 88.9 percentile standing, followed by Italy with the 70th percentile standing, Cyprus with the 69th percentile standing and Greece with a 66.8 percentile standing. The countries with the weakest standings are Estonia at 7.6%; Austria at 13.1%; Finland at 14.9%. There's a substantial mix up the rankings among countries.

Assessment... Since COVID struck (I use January 2020 as the base), there has been a wild ride for the EU indexes across countries. The chart clearly chronicles the sharp drop when COVID hit and another minor set-back then a stronger recovery that peaked out in late-2021 and since then there's been an ongoing slide as inflation picked up into late-2022. Currently, there's a rebound in play from that low that brings the index back but still short of where the indexes were before COVID struck. The percentile standings speak to this issue with moderate strength in most sectors with the exception terrible readings for consumer confidence across the board and that helps to drag the overall monetary union index down below its median value since 1990. However, there's nothing here that makes me think that we want to apply trend analysis to the outlook. The rebound that's underway is contrary to the high inflation rate, rising interest rates from the European Central Bank, and the potential for the onset of a banking crisis to hammer growth. Even if there isn't a banking crisis, there is liable to be a credit pull back as banks rethink their exposures and likely reassess their vulnerability as well as their current impairment relative to the interest rate cycle. Events in the U.S. have refocused attention on the sharp rise in interest rates and what naturally will happen to banks flush with the deposits and making investments in a low interest rate environment that quickly becomes a high interest rate environment. There is nothing about that sort of risk that is intrinsic to the U.S. or to the dollar sector; it is truly a global phenomenon.