Summary: Euro-zone composite sentiment indicator down in May, below expectations; readings down in four of five sectors; down in three of four largest euro-zone economies; German, French 10-year yields considerably lower; index implies annual GDP growth rate of 0.5%.
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 growth rates, although not necessarily as a leading indicator.
The ESI posted a reading of 96.5 in May, below the consensus expectation of 99.0 as well as April’s revised reading of 99.0. The average reading since 1985 is just under 100.
German and French 10-year bond yields finished the day considerably lower. By the close of business, the German 10-year bund yield had shed 9bps to 2.34% while the French 10-year OAT yield finished 11bps lower at 2.90%.
Confidence deteriorated in four of the five sectors of the economy. On a geographical basis, the ESI decreased in three of the euro-zone’s four largest economies, Germany, Italy and Spain, but improved in France.
End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-May GDP growth rate of 0.5%, down from April’s implied growth rate of 1.1% after revisions.
