Tomorrow we have the release of a host of data relevant to the euro all at once. We have CPI, trade balance and ZEW economic sentiment indicator for the eurozone.
But, the one we’ll be focusing on here since it tends to have a lot of impact on the market are the two ZEW surveys for Germany.
Last month, the indicator came in with a surprising drop back into the negative. This caught most analysts off guard. The negative result broke a five-month improving trend, although it didn’t retrace all that much.
Let’s see if it can manage to return to that growth pattern it’s been maintaining since October of last year.
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What We Are Looking For
The consensus is that the ZEW Economic Sentiment Indicator will just barely move into positive to 0.5compared to the -2.1 from last month. For reference, the long-term average is 22.1.
We can expect the ZEW Economic Situation indicator to improve to 11.1 from 8.2 last month. The gap between the current situation and the outlook would actually widen slightly despite both indicators improving.
It should be pointed out, though, that there is also a large block of economists who are predicting that the ZEW ESI will come in lower than the prior month. In fact, there is somewhat of a consensus forming around -6.0. The current situation would also be lower but still remain positive, according to this view.
The Factors and the Diverging Views
Last month’s survey came before the souring of trade relations between the US and China. And this widely impacts how we evaluate Germany’s future situation. They also conducted the survey ahead of the EU Parliament results, where the traditional parties lost the majority and there was consequent uncertainty regarding leadership negotiations.
In fact, President Trump’s surprise move to potentially impose tariffs on Mexico happened during this month’s survey period.
On the positive side, however, we got confirmation of better than expected GDP growth in Germany and the eurozone. Most analysts are expecting the economic situation to improve during the second quarter. However, some of the heavy lifting for improving the outlook is dependent on the ECB, which is in the middle of defining its new leadership.
Looking Ahead for the Markets
The consensus isn’t really firm around a projected number. Therefore, the market is likely not to price in the expectations for the results. Also, with the wealth of other data coming out at the same time, we could see some substantial moves in the euro, even if ZEW surveys for Germany report in line with expectations.
In terms of getting some direction, we’d probably have to consider how the results compare to the prior month. The question is whether the trend will continue higher or whether we will get the second consecutive move to the downside.
We could find ourselves in one of those self-fulfilling prophecies situations. If most institutional investors hold off on capital spending out of concern over future economic growth, then that growth just might not materialize.
The Eurozone and Germany
With lackluster data and increasing expectations of a rate cut by the Fed, the pressure is building on the ECB to do something to support the economy. The spurt of inflation we had last year is waning. If the situation in Germany continues to be pessimistic, then it adds to the potential of ECB action in the relatively near future.