Mixed messages from German and French consumer confidence

Chris Scicluna
Emily Nicol

Following a broadly positive day for European equities yesterday as the results from the European Parliament elections provided no major surprises – with, for example, the nationalist parties overall performing no better than had been expected – little domestic data and no significant developments from President Trump’s visit to Japan to provide direction, major Asian equities were on the whole slightly firmer today, e.g. the Topix was 0.3% higher, while China’s CSI300 rose 1%.

In the bond market, while JGBs rose slightly (10Y yields fell to -0.08%), European markets have started the day on the back foot. Most notably, yields in Italy continued to underperform after yesterday’s significant adjustment – 10Y yields rose around 13bps on Monday – on the back of reports suggesting that the European Commission was considering proposing a disciplinary procedure for Italy next week over its failure to rein in its debt. Looking ahead to the rest of the day, the European and US calendars will bring various sentiment surveys, while UK politics will continue to dominate the domestic news flow. And EU leaders will meet this evening for the first group discussion on the appointments of the next heads of various EU institutions, including the ECB.

Euro area:
The data focus in the euro area today will be on sentiment surveys, most notably the Commission’s business and consumer confidence indicators, which arguably provide the best guide to euro area GDP growth. Not least given last week’s disappointing flash PMIs, the headline economic sentiment indicator is expected to have declined for a thirteenth successive month in May to a three-year low. In contrast, the consumer confidence survey is expected to confirm the improvement reported in last week’s flash release, showing the headline index rising a larger-than-expected 0.8pt in May to -6.5, 1pt higher than the average in Q1, almost 2pts above December’s trough, and the highest level for nine months.

However, the message from this morning’s consumer confidence survey from Germany was less upbeat than of late, with the GfK’s headline index (which is reported as a forecast for June) declining 0.1pt to 10.1, a more than two-year low. This followed a downward revision to May’s reading by 0.2pt to 10.2, leaving it unchanged from April’s level at the lowest since December. While households remained broadly upbeat about their income expectations, they were again more downbeat about the economic outlook, with the relevant index falling to a more-than three-year low. And so their willingness to buy slipped back in May too, albeit still remaining at a relatively elevated level.

In contrast, the French INSEE survey suggested that consumers were much more upbeat in May, with the headline index rising 3pts to 99, its highest level for a year and just below the survey’s long-run average. And there was a clear improvement in consumers’ personal financial situation, while fears about the unemployment trend significantly decreased in the past month. And so the share of households considering it is a suitable time to make major purchases increased again in May, with the relevant index now standing above its long term average.

Today will also bring euro area bank lending figures for April, while in the markets Germany will sell 2Y Schatz.

Following last week’s European Parliament elections, this evening will see EU leaders meet for the first group discussion on the appointments of the next heads of various EU institutions, including the ECB. However, this evening’s dinner seems highly unlikely to reach agreement, so further discussions are likely to be required in June and perhaps even July. That partly reflects the extreme political sensitivities involved with the appointments, and the fact that some leaders will be bruised from the European Parliament elections. But, as for the Commission and Council, there is also a wide field of potential candidates for the ECB top job, meaning that various permutations are possible – please refer to Friday’s Euro wrap-up for more details. One of the leading candidates to succeed Mario Draghi as ECB President – Bank of France Governor Villeroy de Galhau will speak publicly today.

With no top-tier UK data due today, focus will no doubt remain on UK politics, with noise surrounding the potential policies of various Conservative Party leader candidates likely to continue to dominate the headlines, while we might well see additional contenders adding their name to the already large list.

In the US, the housing market will be the main focus today with the FHFA and S&P Corelogic house price indices for March due for release. The Conference Board’s latest consumer confidence survey for May is also due today – while the labour market should continue to boost household confidence, the weaker equity market that month might well have weighed on consumers’ expectations. So, the headline index is likely to have moved broadly sideways this month, close to the top of the range for 2019, but broadly in line with the average of last year.

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