Week Ahead: Economic Indicators (Europe)

Tuesday June 17th
German ZEW Economic Sentiment
The ZEW Indicator of Economic Sentiment is calculated from the results of the ZEW Financial Market Survey. The ZEW is followed closely as a precursor and predictor of the Ifo Sentiment Survey and as such is followed closely by market participants. The data is released around the middle of the month for the current month. The survey provides a measure of analysts’ view of current economic conditions as well as a gauge of expectations about the coming six months. The latter measure tends to have a larger market impact and reflects the difference between the share of optimistic analysts and the share of pessimistic analysts. About 350 financial experts take part in the survey.

German ZEW Current Conditions
This survey summarizes the net percentage of positive and negative responses regarding the expectations for economic growth in the next 6 months, as given by financial analysts from banks, insurance companies and large industrial enterprises. For example, if 50% believe that the economic situation will improve and 20% believe it will get worse, the result will be +30.

Market Reaction
A reading that is stronger than forecast is generally supportive (bullish) for the Euro, while a weaker-than-forecast reading is generally negative (bearish) for the Euro.

Eurozone ZEW Survey Expectations
(ZEW) Economic Sentiment Index rates the relative six-month economic outlook for the euro zone. On the index, a level above zero indicates optimism, below indicates pessimism. It is a leading indicator of economic health. The reading is compiled from survey of about 350 German institutional investors and analysts.

Market Reaction
A higher-than-expected reading should be taken as positive/bullish for the EUR, while a lower-than-expected reading should be taken as negative/bearish for the EUR.

Wednesday June 18th
UK Inflation
The Consumer Price Index (CPI) is an average measure of the level of the prices of goods and services bought for consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union’s statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England’s target inflation measure.

The Consumer Price Index is the most widely followed indicator of inflation. In countries such as the UK, where monetary policy decisions rest on the central bank’s inflation target, the rate of inflation directly affects all interest rates charged to businesses and the consumer. Inflation is an increase in the overall price level of goods and services.

Inflation (along with various risks) explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates.

Market Reactions
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

A higher than expected reading should be taken as positive/bullish for the GBP, while a lower than expected reading should be taken as negative/bearish for the GBP.

UK PPI
The Producer Price Index (PPI) measures the prices of goods bought and sold by manufacturers. The input price index measure the prices of materials and fuels purchased by manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running. The output price index captures prices charged by manufacturers as they pass through the factory gate and excludes any VAT or similar deductible tax. Both measures may be seen as leading indicators of consumer price index (CPI) inflation although the short-term correlation is only very weak.

Market Reaction
The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Thursday 19th June
Swiss SNB Interest Rate
Swiss National Bank (SNB) governing board members come to a consensus on where to set the target range for the rate. Traders watch interest rate changes closely as short term interest rates are the primary factor in currency valuation.

What are the fundamental effects?
Could have an effect on businesses for the sudden change in the cost of credit on their corporate balance. Consumers could also be affected since the shifts in Monetary policy influence other short-term rates like Bank deposits, personal loans, credit cards, home equity loans and adjustable-rate mortgages. Higher rates might make banks more reluctant to borrow overnight funds, so might lend out less money or charge businesses and consumers a higher rate to offset the rates.

How does it affect the markets?
CURRENCY – The swiss might rally if the SNB is showing an inclination to raise interest rates. How much the pound might move depends on if the Foreign Exchange Markets have taken these hikes into consideration. If they have taken it into consideration then the dollar movement may be minimal.

STOCKS – The relationship between stock prices and the SNB interest rate is quite direct when rates rise or hinted that they will be. Higher rates might dampen inflation pressures, but rate hikes also increase the cost of doing business and could cut profit margins.

BONDS – Investors might flee the long bonds if rates rise as it could confirm that inflation is on the rise and they may instead chase the shorter-term securities. As the sale of bonds accelerates their yields will rise, once investors grow confident that the monetary policy is working and inflation appears steady, they switch to buying bonds again to lock in the highest yield possible.

BoE Interest Rate
What is it?
The Bank of England’s monetary policy committee members vote on where to set the rate.

What are the fundamental effects?
Could have an effect on businesses for the sudden change in the cost of credit on their corporate balance. Consumers could also be affected since the shifts in Monetary policy influence other short-term rates like Bank deposits, personal loans, credit cards, home equity loans and adjustable-rate mortgages. Higher rates might make banks more reluctant to borrow overnight funds, so might lend out less money or charge businesses and consumers a higher rate to offset the rates.

How does it affect the markets?
CURRENCY – The pound might rally if the BoE is showing an inclination to raise interest rates. How much the pound might move depends on if the Foreign Exchange Markets have taken these hikes into consideration. If they have taken it into consideration then the dollar movement may be minimal.

STOCKS – The relationship between stock prices and the BoE interest rate is quite direct when rates rise or hinted that they will be. Higher rates might dampen inflation pressures, but rate hikes also increase the cost of doing business and could cut profit margins.

BONDS – Investors might flee the long bonds if rates rise as it could confirm that inflation is on the rise and they may instead chase the shorter-term securities. As the sale of bonds accelerates their yields will rise, once investors grow confident that the monetary policy is working and inflation appears steady, they switch to buying bonds again to lock in the highest yield possible.

UK BoE Meeting Minutes
What is it?
A detailed record of the Bank of England’s policy-setting meeting.

Friday 20th June
UK Retail Sales
Retail sales measure the total receipts at stores that sell durable and nondurable goods. The data include all internet business whose primary function is retailing and also cover internet sales by other British retailers, such as online sales by supermarkets, department stores and catalogue companies.
Headline UK retail sales are reported in volume, not cash, terms but are available in both forms. The data are derived from a monthly survey of 5,000 businesses in Great Britain. The sample represents the whole retail sector and includes the 900 largest retailers and a representative panel of smaller businesses, including internet sales. Collectively, all of these businesses cover approximately 90% of the retail industry in terms of turnover.

Core Retail Sales
The Core number excludes Auto Fuel, which tend to be very volatile.

Why Investors Care?
The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth.

Market Reaction
A higher-than-expected reading should be taken as positive/bullish for the GBP, while a lower-than-expected reading should be taken as negative/bearish for the GBP.