Economic news has surprised positively in the Eurozone but negatively in the US in recent months, probably contributing to Eurozone equity market outperformance. Monetary trends suggest that this gap will close during the second half of 2017, with convergence driven initially by a cooling of Eurozone news.
Citigroup’s G10 economic surprise index reached a six-year high in January but has fallen sharply since March, to around zero – see first chart. With positive and negative news balancing out, a reasonable interpretation is that the global economy is no longer accelerating, consistent with the forecast here that momentum would peak in the spring and decline over the summer. The latter development should be signalled by the surprise index turning negative.
The move lower has been driven by downside surprises in the US and UK, with Eurozone news remaining upbeat and Japanese news strengthening recently. This pattern accords with earlier monetary trends: six-month growth of real narrow money in the US and UK fell sharply in late 2016, moving below solid levels in Euroland and Japan – second chart.
As previously discussed, however, US real money growth has rebounded strongly since early 2017, and the expectation here is that it will move above the Eurozone level in June. The US economy, therefore, should reaccelerate by the fourth quarter, in which case the US surprise index is likely to return to positive territory, converging with or overtaking the Eurozone index.
Consensus economic expectations for Euroland may have become overinflated, partly reflecting the recent strength of purchasing managers’ surveys – the composite PMI output index reached a six-year high in April / May. The suggestion, however, that economic growth has stepped higher is not supported by monetary trends, with six-month real narrow money expansion in the middle of its range over the past three years. The expectation here is that GDP will continue to expand at its recent pace of 1.75-2.0% annualised.
PMI trends correlate loosely with real money growth nine months earlier – third chart. Recent PMI results have been stronger than expected based on this relationship but may incorporate a temporary sentiment boost from the French election result. The appreciation of the euro is a potential drag – the effective exchange rate has risen by 3% since April. A reversal of PMI gains may contribute to the Eurozone surprise index following the US index into negative territory over the summer.