Summary: Euro-zone composite sentiment index up in July; slightly above expectations; readings from major euro-zone economies all up; sovereign bond yields a touch higher on day; index implies 5%+ GDP growth.
The European Commission’s Economic Sentiment Indicator (ESI) is a composite index comprising five differently-weighted sectoral confidence indicators. It is heavily weighted towards confidence surveys from the business sector, with the consumer confidence sub-index only accounting for 20% of the ESI. However, it has a good relationship with euro-zone GDP, although not as a leading indicator.
The ESI posted a reading of 119.0 in July, slightly above the market’s expected figure of 118.2 and higher than June’s reading of 117.9. The average reading since 1985 has been just under 100.
Confidence improved across only two of the five sectors. The services and industry sub-indices both improved while the retail trade, construction and consumer sub-indices all deteriorated. On a geographical basis, the ESI increased in Germany, France, Italy and Spain.
German and French 10-year bond yields finished the day a touch higher. By the close of business, the German 10-year bond yield had crept up 1bp to -0.45% with the French 10-year yield finished unchanged at -0.10%.
End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-June growth rate of 5.1%, up from June’s comparable figure of 4.9%.