EU Sentiment and Large Country Sentiment Erode

The EU indices for March remind us that since year end the circumstances in Europe have eroded. Around December several large EMU members were seeing a local high in their respective sentiment gauges, a high that has since unwound. The strong dollar, falling commodity prices and spreading weakness from difficulties in China as well as other factors contributed to that. Three of the largest EMU members have their sentiment gauges lower for three months running (Germany, Italy and Spain). The EU gauge is lower for three months running as well as the EMU index.

The EU sector indices show weaker conditions in March than in February for consumer confidence, construction, and services. Doing better month-to-month is the industrial sector and the retail sector, the latter just barely. Since December, however, each of these sectors is lower on balance.

The EU index stands in the 58th percentile of its historic queue of values above its media which occurs at the 50th percentile. The EMU index stands lower, in its 55th percentile. Neither of these is an impressively strong standing.

For the EU, the strongest sector is retailing which has a 94th percentile standing in March; it is this strong or stronger only about 6% of the time. Consumer confidence stands at its 70th percentile, a firm but less robust standing. The services sector is positioned in its 64th percentile. Construction has a 53rd percentile standing. The industrial sector pulls up last with a 52nd percentile queue standing. These queue standings position this month's index in an ordered queue of historic observations. In March, we find all the sector readings are slipping and that the queue standings are moving toward more moderate readings.

The bottom portion of the table positions the economic sentiment gauges for the EMU members plus the U.K. There are only two EMU members with queue standings at or about their respective 60th percentile standings: those are tiny Malta (64.3%) and Spain (73.3%). Four countries are weaker than their respective 40th percentile standings; they are Greece (17.9%), Austria (31.1%), Estonia (31.3%), and Finland (37.8%). France and Belgium have readings at their respective 50.1 percentiles, barely above their historic medians. As you can see, there is a lot of moderation and not a lot of strength in the EMU.

Of the 17 EMU reporters in the table, seven saw sentiment declines in March and fourteen have seen declines in February. Eight saw declines in January. That is a lot of weakness

The ECB has adopted a negative rate policy, but it is a policy that is controversial. Mario Draghi has tried to make it clear that the ECB could do more. But in the last few days two ECB council members, Jozef Makuch and Benoit Coeure, have made it plain that they see limits to the desirability of any further rate cuts and register some doubt about the potential for even lower rates to be effective. Neither money supply nor loan growth appears to be responding that well to any of the recent ECB monetary moves.

Against that background, Fed Chair Janet Yellen surprised markets with a speech yesterday that was much less hawkish in its tone. Yellen even talked about the Fed's remaining tools to stimulate the economy should conditions weaken talking up the unconventional tools that have used in the past. Previously she had avoided any talk of the Fed's downside tools and had been focused on the fact of the Fed tightening or normalization process. That has changed.

The Fed Chair's new positioning of Fed policy and the reduced rate profile signaled by the FOMC members' individual outlooks (known as `The Dots') seem to admit a new way of looking at the world and its risks. Suddenly we find the Fed is less hell-bent on normalization and more data dependent although previously we thought the two were sharing the limelight. There appears to be some policy switching going on. Yellen seems more worried about China and global events at least this is the impression from the amount of time she spent talking about those things in her speech. Heretofore the Fed hardly seems to give the time of day to international events. Suddenly they loom like Godzilla on the horizon.

For the moment despite some central bank rhetoric, which we must take with grain of salt, there seems to be little trust in the power of negative rates and at least as much fear as hope in using them. Globally growth momentum has been cut dramatically from what has not been a great run of growth to begin with. While central bankers might complain about the absence of fiscal policy for various reasons, it still is held in abeyance.

Markets have reacted positively to this admission of a revised outlook despite the more hostile environment for corporate earnings it implies. It also implies a friendlier background for bonds which had been suspecting as much for some time. The rise of gold prices is something to be wary of. And oil is still floundering at low levels and seems to be unsure how to play the change in circumstance. But it still has an all-inclusive OPEC meeting to weather. Perceptions of risk seem to be higher with growth and interest rates lower in this brand new world view. The ADP cut its outlook for Asia today. The trimming of the outlook continues to be in train. Yellen's speech could turn out to be a watershed for the global outlook as well.