Soft Data Fading In Europe Leaves Equity Market On Bed Of Sand

Authored by Simon White, Bloomberg macro strategist,

Buoyant soft data has driven much of the recent optimism in Europe but it is now beginning to sour, leaving the equity market poised to begin underperforming after outpacing DM stocks for most of the past two years.

The German ZEW’s expectations component came in significantly weaker than forecast.

This gives a good six-month lead on the euro-zone’s composite PMI, and points to it weakening through the remainder of the year.

Expectations for growth in the euro-zone last year and this year were dismal. But a milder winter led to a less-bad-than-feared outcome, and soft, survey-based data like the PMI registered this optimism, helping fuel sentiment and a stock-market rally.

But all the hopium in the world won’t by itself change the hard data, which is what ultimately counts. Growth is barely above zero, retail sales are contracting, and credit is tightening.

Economic surprises have been rising, but they were driven primarily by soft data exceeding expectations. Hard data (apart from labor) consistently disappointed. Now soft data is disappointing as lofty expectations are coming up against reality and heading back to earth.

Expect this trend to continue. Real money growth in Europe has collapsed, and this points to data beginning to disappoint more.

(As an aside, this relationship shows that economists in the aggregate do not consistently track money growth as a leading indicator of economic activity.)

Data worse than expectations and weakening sentiment leaves European stocks in greater jeopardy, especially at a time when the Fed is coming towards the end of its hiking cycle - a strong indication that US stock outperformance about to re-assert itself.