Understanding Euro Zone Economic NewsEuro Zone Economic News Explained:
Purchasing Managers Index Manufacturing:
The Purchasing Managers Manufacturing report is a survey of manufacturing providers in the Eurozone (EZ) and focuses in on issues such as costs and demand.
Essentially, a strong PMI, in which costs are low and demand is improving is bullish for the Euro, whereas a survey that results in increasing costs and decreasing demand implicates speculation against the Euro.
Manufacturing is a significant component of the EZ economy, and thus a survey that indicates optimism or pessimism about the sector can really get the markets moving, the Euro in particular.
A reading of 50 is a critical measure in the PMI index with a number below 50 indicating contraction and a number above 50 indicating expansionary conditions. Taking a strong position based solely on the PMI Manufacturing Survey though could prove to be regretful.
Purchasing Managers Index Services:
The Purchasing Managers Services report is a survey of service providers in the EZ and focuses in on issues such as costs and demand.
Essentially, a strong PMI, in which costs are low and demand is improving is bullish for the Euro, whereas a survey that results in increasing costs and decreasing demand implicates speculation against the Euro.
A reading of 50 is critical measure in the PMI index with a number below 50 indicating contraction and a number above 50 indicating expansionary conditions.
The services sector is very important to the EZ and any significant gains or shortcomings could set the Euro climbing or falling.
Retail Trade:
Retail Trade is the measure of retail sales, and thus the willingness of the consumer to spend.
An upswing in this figure could result in Euro buying whereas a shortfall could cause Euro selling.
This number is very important to the trader because it correlates to consumer conditions and outlook within the EZ region.
If the Retail Trade figure comes in strong it means that consumers are spending money and thus are probably well off, hinting that EZ consumer confidence and the CPI may also be strong.
However, if Retail Trade figures are low, it could suggest that interest rates are too high, consumer confidence is sinking, or businesses are suffering. Clearly, a worse than expected Retail Trade figure offers more information (though ambiguity hand-in-hand) than does a strong figure because a strong figure seeks reinforcement from other indicators (such as the CPI and Consumer Confidence survey) and thus lags, whereas a less-than-expected figure immediately suggests that the EZ economy is most likely turning sour in one respect.
Traders will often react immediately to this release, but much caution is exercised due to the wide array of implications this number carries with it. It is inadvisable to trade solely on this figure.
German Retail Sales:
German Retail Sales are very similar to the Retail Trade figure but differ in that they report an aggregate number of sales at retail outlets to provide for a better estimate of German private consumption.
Like in Retail Trade, traders will often look to long the Euro should the figure be impressive, and short the European currency should it fall below expectations.
Much like Retail Trade, traders will use the Retail Sales figure to better understand the direction of the economy in terms of other key economic releases. One of the few advantages the German Retail Sales has over Retail Trade is the time of release. Because the German figure is reported before the EZ number, traders can “jump the gun” should they wish, though acting in such a manner is not usually advisable in the Forex market.
Eurozone Gross Domestic Product:
The general rule of thumb when using GDP as a fundamental signal to trade is that an improved number means Euro positive whereas a lesser or unchanged figure translates into Euro stagnancy or bearishness.
The Eurozone Gross Domestic Product is a measure of the progress of the Eurozone economy as a whole.
The figure is very important to traders because it gauges the level of performance with which the Europeans are proceeding as well as harbingers and undermines the set of economic data that is expected to be reported from the region during a certain time period.
Generally, the disclosure of a number that’s either expected or ahead of forecasts sets off bullish signals for the Euro; a number that falls below predictions invokes the Euro bears. GDP data for Germany, France, Italy, and the collective Eurozone region tend to be most closely followed.
Current Account:
The Current Account Deficit is probably the most comprehensive measure of international transactions for Europe as it is the measure of net exports, (total exports minus total imports).
If the figure falls below expectations, slight movements against the Euro should be expected. But it is also important to keep in mind that a number that outperforms or either falls short of expectations is not necessarily going to get the traders to act hastily.
The release of this number is monthly and tends to be in accord with the Trade Balance numbers that are generally reported a day or two in advance of the Current Account figure.
The Current Account Deficit is usually interpreted in one way; a large negative number is damaging to the European currency. This is because the Current Account is a reflection of the net exports, and if it is negative, it shows that the Eurozone is importing more than it is exporting; a bad sign for industries at home and means that more Euros are going out of than coming into the region.
However, the negativity of the number is not what traders pay attention to, but rather the change in it; the marginal change in the Current Account. The logic is very similar to that behind the GDP in that if a number comes in below expectations, it could hurt the Euro, whereas if it out performs forecasts, it could prove bullish for the European currency (despite its negativity).
However, this number cannot be solely “judged by its cover” because the number says a lot more than meets the eye. For instance, a more negative figure does indeed signal a decrease in net exports, but at the same time could also serve to patron other economic releases, such as consumer spending.
If the Europeans are spending a lot of money, and that money is leading them to buy things from abroad as their fiscal conditions are allowing them to do so, then a decrease in net exports doesn’t seem so “damaging” to the Eurozone economy; it could simply mean people are buying things exotic to them because they are better off. Generally though, the trend in industrialized western nations (Eurozone included) has been that a more negative Current Account is damaging to industries at home. So if the figure falls below expectations, at least slight movements against the Euro should be expected.
Unemployment Data:
Unemployment is a very significant indicator for Eurozone performance.
It is reported in the beginning of every month and measures the percentage of the workforce that is currently out of a job but is actively seeking to be employed.
Generally, traders understand slight improvements in the unemployment figure (as monthly figures generally vacillate by tenths of percentages) to be positive for the Eurozone economy and will buy Euros, whereas a no-change or increase in the unemployment numbers could lead to Euro stagnancy or dumping across the board.
The figure is important because it signals how hard the Eurozone is actually working and helps to foreshadow consumer spending. High unemployment generally leads to lower consumer spending which can be bearish for the Eurozone economy as well as the Euro. The flip scenario is also true, weak Eurozone employment is bearish for the economy as well as the Euro.
Generally speaking, unemployment raises concerns about the performance of firms, questioning whether businesses are either not hiring because they do not need more help, or are not hiring because they cannot afford to do so. If the latter is the case, then it could prove even more bearish for the Euro as it could be forecasting sour economic data regarding the productivity of businesses.
German Unemployment:
The German Unemployment figure is expressed in thousands and measures the change in unemployment in Germany; a positive figure says that more people are unemployed, thus leading to Euro selling, whereas a negative figure is indicative of decreasing unemployment and thus leads to Euro buying.
Germany is important because it is the Eurozone’s largest economy.
Any big or unexpected movements in this country have significant consequences for the Euro. This figure usually coincides with the Unemployment rate, but offers “greater detail” as it reports actual numbers, so that traders may have substance to trade off of if the rate itself remains unchanged.
Consumer Price Index:
The Consumer Price Index measures the change in price for a fixed basket of goods and services purchased by consumers.
The higher the CPI, the more positive it is for the Euro, whereas the opposite is also true.
The ECB has a 2% inflation target, so whenever consumer prices grow by more than 2%, the ECB becomes concerned and contemplates the need for rate hikes.
If consumer prices grow by much less than 2%, the central bank has more flexibility to adjust monetary policy and interest rates. If the CPI has substantial gains, then the ECB would have the incentive to raise interest rates to keep inflation in check, thereby benefiting the Euro.
However, if the CPI remains idle, or prices decrease, then even a rate cut is possible.
CPI itself though consists of a few major components: one that includes energy prices, and one that includes food prices.
These two constituents are very volatile and thus tend to sometimes “exaggerate” the CPI.
Though they are undoubtedly considered when considering inflationary concerns, many times traders will also focus in on the “core CPI” to see how the change in prices in other sectors measured up to the changes in these two key areas.
Either way, a sharp increase would generally prompt Euro buying, and a decrease would call for Euro dumping.
German ZEW Survey:
The German ZEW economic survey reflects the difference between the number of economic analysts that are optimistic and the number of economic analysts who are pessimistic about the German economy for the subsequent six months.
Obviously, a positive figure bodes well for the Euro, while a negative number foreshadows Euro selling.
The ZEW survey is important because firstly, it gauges the economic productivity of Germany, the Euro-Zone’s largest economy. Secondly, it forecasts the string of economic releases concerned with the different sectors of the economy. For instance, something like Factory Orders, Industrial Production, or even Retail Sales could be implicated (or at least their negative or positive changes) in the ZEW survey.
Therefore, the survey is one of the key economic indicators that move the Euro during its time of release; the sentiment that results usually fuels the Euro strongly in one direction (at least in the short-term intra-day period).
German IFO Survey:
The Germany IFO economic survey is much like the ZEW economic survey in that it measures the sentiment, the confidence, in the German economy, but differs in that it includes the market-moving words of business executives.
Usually, an improvement in the figure leads to Euro bullishness whereas a decrease or an unchanged number leads to either Euro stalemating or dumping.
The IFO survey usually follows the ZEW and reflects sentiment along the same lines.
However, should there exist a discrepancy between the ZEW and the IFO, traders tend to give the ZEW a bit more favoritism because it lacks the bias of business executives.
Trading on either the ZEW or IFO survey isn’t usually very lucrative, unless both of these numbers are in line with each other and reinforce other key fundamental indicators as well.
Industrial Production:
The Industrial Production figure is a measure of the total industrial output of them Euro-Zone either on a monthly or yearly basis.
The number is very significant as an improvement in the figure could lead the Euro to make significant gains whereas a decline or stagnant number could lead to weakness in the European currency.
The reason Industrial Production is important is because it is a confirmation of its type of preceding economic releases (PPI, CPI, Retail Sales, etc.); the only key data following the IP figure being the Eurozone CPI estimate.
This is why many times, by the time the Industrial Production data is due for release, traders will argue that the market has already “priced in” industrial productivity in the previous economic releases.
Therefore, though large gains or losses in this figure could spark some immediate movement in the market, the market has more or less, factored in the expected Industrial Production data.
German Industrial Production:
German Industrial Production is a composite index of German Industrial Output that accounts for about 40% of GDP.
This figure is very important because it measures the level of German Industrial Production; an improvement usually signals a “buy” in the Euro, whereas a decline in the figure constitutes a “sell” to many traders.
The reason this particular IP report is more important is because not only does it measure the industrial output of Germany, the EZ’s largest economy, but also because of the fact that though it comes out late in the month, it is one of the first IP reports, and thus serves as a harbinger to the EZ IP report; if Germany saw decline, then the EZ IP report probably won’t be too bright, at least from the perspective of the trader.
In a sense, the EZ IP continues to get priced in before its release.
The German release has four significant components: manufacturing, which constitutes 82% of the figure, construction, which accounts for 9.5%, energy that has a 5.9% share, and mining which has the smallest share at 2.7%. Though all four components are important for Germany, movement in its largest constituent, manufacturing, usually carries the weight of the figure and has the attention of traders.
German Factory Orders:
German Factory Orders is an index of the volume of orders for manufactured products in Germany.
This is a key figure for many traders, as an improvement in the number signals buying of the Euro, while a shortcoming signals a sell-off.
The reason this reading is important is because Factory Orders not only reflect the strength of businesses but also help forecast other key economic releases such as retail sales.
If orders are high, then businesses need more inventory, meaning that consumers are probably purchasing more.
Traders key in on this figure, especially its components, before reacting towards the Euro.
The four major constituents of German Factory Orders include intermediate goods (45.6%), capital goods (35.1%), consumer durables (11.8%), and consumer non-durables (7.4%). All four are very significant, but for different reasons.
Traders will take the first two figures, the intermediate goods and capital goods, as an understanding of the strength of businesses within Germany.
If there is an increase in these categories, then subsequent economic releases such as the PMI could also look very bright.
The second two say much about consumer confidence and retail sales; if these two sectors are outperforming expectations, then the Euro could see significant gains.
However, traders are usually wary when interpreting the German factory orders, because given some economic scenarios, gains in some sectors may very well offset losses in others whereas during certain time periods a different emphasis may be given to the different components. Therefore prudent traders will usually first consider the weight of each component before the release comes out and then act accordingly.
Eurozone Labor Costs:
The Eurozone Labor Costs (inclusive of both direct and indirect) figure reports the expenditures endured by employers in the EZ region in order to employ workers.
Traders will generally understand higher costs to be negative for the EZ and consequently short the Euro, whereas decreasing costs may result in buying the Euro. However, it is advisable to understand the complexities involved in labor costs.
On one hand, labor costs could be interpreted as a negative for businesses, but on the other hand they could be viewed as a positive stimulus for the economy. This is because firms may simply be hiring more qualified and thus more “expensive” individuals to increase specialization.
If this is the case, then individuals within the economy may be better off, signaling that optimism is rising in the EZ; the Euro may see more gains. Also, there exists the possibility that while costs are rising, revenue is also rising, thus keeping total profit for businesses constant, and at the same time increasing payouts to workers, a signal that the EZ is expanding.
In this case, the Euro may also be bought. However, understanding this complexity is again subject to the current economic scenario surrounding the EZ; if it is in a situation where expansionism is fertile or businesses have excess capital, then only can the increasing costs in labor justify a long position in the Euro. If that is not the case then increasing labor costs will result in Euro shorting.
