To help you make sense of economic indicators, I have opted to organize today’s Piponomics in a neat little FAQ. I even made a nice image for those of you who like them pretty pictures.
There are basically two types of answers. The first is a straight-from-the-book and technical answer for all you economics junkies. The second is a “street” answer” for my homies who wanna keep it real and simple.
What exactly is the ZEW Economic Expectations report?
Formal Answer: ZEW stands for Zome European Words. Naw, I’m just kidding. Zentrum für Europäische Wirtschaftsforschung and it is a center for European Economic Research. The survey is what you’d call a “leading indicator,” which means it is used to predict how the economy will perform over the next couple of months. To be specific, the survey measures the 6-month outlook for the euro zone based on the following factors like interest rates, industry growth, sentiment, etc.
Street Answer: It measures how awesome or crappy investors, analysts, and economists believe the euro zone will be over the next 6 months.
How is the ZEW report measured?
Formal Answer: The line in the sand is 0.0. What this means is that scores above this level indicates that the survey respondents were optimistic about the outlook, while scores below this mean that the respondents were pessimistic.
Street answer: 0.0 = Emotionless Kristen Stewart. Above 0.0 = Internet Star Jennifer Lawrence. Below 0.0 = Lindsay Lohan’s successor, Miley Cyrus.
Why the focus on Germany?
Formal Answer: The main reason why the ZEW reports highlight the German economy is because it’s the largest economy in the euro zone. Furthermore, German officials normally have the biggest pull in terms of political might and for the most part, set the direction that the euro zone is headed in.
Street answer: Germany is just like Superman. Strong. Powerful. A leader. Without Superman, there is no Justice League. Same goes with Germany – without the economic powerhouse, there is no euro zone.
How effective is the ZEW report as a leading indicator?
Formal Answer: A look at the chart above shows that the a trend in the ZEW report has been followed by a similar move in EUR/USD at least eight times in the past 10 years. I dunno about you, but that’s way too many times to be just a coincidence!
If you think about it though, this makes fundamental sense. If the euro zone is doing well, it will most likely lead to an increase in spending and consumption, which in turn will give GDP a boost. For the most part, this is bullish for the euro.
On the other hand, if the euro zone isn’t performing, investors will become more pessimistic and chances are that the euro will fall.
Street Answer: It’s as simple as 1-2-3, baby! If the ZEW is on the rise, load up on the euro. If the ZEW is trending lower, dump the euro like an ex-girlfriend.