Economy in Brief

The economic situation, surveyed by the ZEW's survey, showed improvement in the euro area to -38.6 in May from -48.8 in April. The German survey improved to -72.3 in May from -79.2 in April. However, the economic situation in the United States lost some of its luster, with its index falling to 40.9 in May from 48.5 in April.

The survey for expectations in Germany improved to 47.1 in May from 42.9 in April. For the U.S., macroeconomic expectations remained negative at -13 in May, weaker than the -0.7 reading in April.

Inflation expectations and showing moved away from the view is an inflation was continuing to fall as the euro area continued to post a negative value of -45.6 in May, but that was stronger than the -49.1 in April. Germany's reading rose to -41.0 in May from -47.8 in April. The reading for the U.S. was much less changed, at -41 in May compared to -42.6 in April.

On the back of those expectations, short-term interest rates in the euro area were less intensely forecasted to fall as the headline reading of -80.5 in May rose from -84.6 in April. In the U.S., the reading rose to -55.2 in May from -63.7 in April.

Long-term interest rate expectations continue to drop, however. In Germany, expectations for long-term rates fell to -33.5 in May from -26.9 in April. In the U.S., the reading edged lower to -28.3 in May from -26.5 in April. The outlook for lower long-term interest rates is still intact.

Stock market performance in May is stronger in the U.S., euro area, and Germany. This is despite some minor degradation in the assessment for current conditions and expectations in the U.S. Euro area stock market expectations showed its diffusion value of 23.3 in May, up from 7.2 in April. The German reading rose to 18.7 in May from 3.8 in April. The U.S. index in May rose to 21.5 from 9.9 in April. All-in-all, the ZEW survey participants are becoming much more constructive on the stock market as they become modestly and more constructive on the bond market.

Despite these various shifts in the survey, the percentile standings of most of these indicators remain extremely weak: for example, economic situation assessments stand in the 41st percentile for the euro area, the 17th percentile for Germany but manage to rise above the neutral mark of 50 to the 58.1 percentile in the U.S. Economic expectations in Germany have crept up to a 68.8 percentile reading compared to only a 32.3 percentile reading in the U.S. Inflation expectations everywhere remain low with the euro area and the U.S. having percentile standings below their 10th percentile, while in Germany they post a still-low value in its 14th percentile- all those are very low readings. Short-term interest rate expectations in the euro area have been lower only 4.1% of the time; in the U.S. they've been lower only 9.3% of the time. Long-term rate expectations have been lower in Germany only 2.2% of the time and in the U.S. only 1.9% of the time on the ZEW survey metric. Participants continue to look for extremely low long-term interest rates. The stock market expectations, while up sharply in the month, have only reached the 24th percentile for Germany, the 12th percentile for the euro area and the 38th percentile for the U.S. On balance, stock market expectations haven’t reached their median values in any of these areas and although they've improved the outlook for their performance is still muted.

In this week's letter, we examine monetary developments in Asia. In particular, we take stock of the latest decisions by central banks in the region and delve into the possible motivations behind them. We find that while the Fed's policy trajectory remains a key policy focus, their recent actions have also been driven by domestic factors. Furthermore, we also find their policy priorities to be wide-ranging, with some aiming for currency stability, while inflation remains the focal point for others.

In Japan, recent bouts of yen appreciation have fueled speculation about potential currency intervention by the authorities. Also, the Bank of Japan’s latest summary of opinions indicates an unexpected shift from some members towards a more hawkish stance. In South Korea, persistently high inflation and potential improvements to Q2 GDP growth serve as reasons for the central bank to keep rates higher for longer. In Indonesia, the central bank’s recent surprise rate hike has drawn attention to its focus on currency stability and its broad range of policy tools. In Thailand, the central bank remains committed to maintaining its policy rates, despite ongoing governmental pressure for looser policy. Finally, in Malaysia, we acknowledge the central bank's consistent approach to policy rates and explore recent developments concerning the ringgit.

Japan The yen experienced sudden bouts of appreciation in early May, with the USD/JPY exchange rate having fallen by about 3% through May 2-3 (Chart 1). The moves spurred speculation that Japanese authorities had stepped in to support the yen following its prolonged spell of weakening this year. To infer possible episodes of currency market intervention, some market participants have turned to analyzing the Bank of Japan’s (BoJ) daily current account data for clues. Specifically, market participants looked at the BoJ’s daily net receipt of funds and contrasted them with broker-estimated figures to estimate possible currency intervention activity. Regardless, and despite its sporadic moves, the yen seems to have resumed its previous trend toward weakening. This has been fueled in part by the still-wide yield differentials between Japan and other major economies.

Japan’s economy watchers index stayed below the breakeven threshold of 50 in April, falling further to 47.4 from a level of 49.8 in March. These numbers compare to a reading of 51.3 in February. Over 12 months, the economy watchers index has fallen by 5.9 points. It made 3.3 points of that drop over six months and 2.8 points of that drop over three months. Taking the April level of the economy watchers index and expressing it as a percentile standing, the level is at 49.8%. A standing below its 50th percentile means it is below its median when ranked among data since April 2003.

The economy watchers subindexes across industries and the other functional categories show slippage (diffusion below 50) for each one between March and April. In addition, all categories weakened in March compared to February except for the reading for eating and drinking places and the reading for employment. And many March diffusion readings are below 50. The economy watchers index is clearly on a run of weakness.

Overall the current index ranks below its historic median as we noted above; components that are below their median values are retailing, manufacturing corporations, and employment. The employment reading is the weakest one in the table with the standing only at its 29.6 percentile. At that ranking, it sits near the top of the lower third of all observations since April 2003. That's an all-too-weak reading for such an important index for the economy.

Sequential changes in the current index show over three months all components are lower on balance except nonmanufacturing firms. Over six months, all components are lower on balance except nonmanufacturing firms and housing. Over 12 months all components are lower on balance except for housing. The Bank of Japan has had some concern about inflation and these concerns have become a bit more two-sided; a weakening economy is not going to allow the BOJ to raise interest rates and to proceed in its objective of returning monetary policy to a range of normalcy. Consumer spending in Japan has been weakening as well. Overall, the economy watchers index fits into a profile of an economy that's weakening rather than strengthening.

The future index The economy watchers index has a future component. This component also weakened in April compared to March and has slipped below a diffusion value of 50, dropping to 48.5 in April from 51.2 in March. This indicates falling expectations. The percentile standing of the future index is in its 47.8 percentile, below its historic median also on data back to April 2003. All the readings for the future index have diffusion values below 50 in April except for employment, which moved up slightly to 51.3 in April from 49.4 in March. And all the components in April weakened compared to March except for that employment reading. In addition, all the components in March had weakened compared to February except for retailing. This gain is broad-based weakening clustering at values close to the diffusion level of 50 that marks the dividing line between expansion and contraction.

Like the current index, the future index is mired in a patch of weakness. Over three months all the future indexes are lower on balance with the headline falling by 4 points over three months. Over six months all of the components are lower on balance except for retailing that is up by 0.7 points. The future headline is lower by 1.3 points over six months. Over 12 months all the components are lower without exception and the headline is lower by 6.1 points.

Clearly, expectations have been scaled back for Japan’s economic performance. The headline’s 47.8 percentile standing leaves it below its historic median. This result is, in part, generated by a housing reading below its median at the 39.1 percentile and by manufacturers with a 39.5 percentile standing. Employment has a 43.5 percentile standing which is below its median but not as weak relative to other past future readings as the current index for employment is weak compared to its past index values. So as weak as the current economy is on the employment side, the future economy doesn't have the same degree of pessimism associated with it as the current index.