The Trader's Guide to the Euro Area E-Book

David J. Powell

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 286

Veröffentlichungsjahr: 2013

Beschreibung

The euro area remains in a state of flux and appears to be unsustainable in its present form. The outcome of the crisis may be unknown for years and a judgement on the project’s success or failure may be out of reach for decades.

In the meantime, analysts, portfolio managers and traders will still have daily, weekly, quarterly and annual benchmarks. They will have to analyze economic developments in the euro area and their impacts on financial assets. The objective of this book is to provide a framework for that analysis that is comprehensible to most financial market participants.

The book begins with a focus on coincident and leading economic indicators for the euro area. The following section looks at euro-area institutions. The next chapter focuses on the euro crisis. It attempts to provide an explanation of its origins and a glimpse of the potential outcomes. In addition, the tools needed to analyze the crisis as it evolves are presented.  The last sections provide information unique to the economies of Germany, France, the U.K., Switzerland, Sweden and Norway.

Leseprobe

Contents

Acknowledgements

Chapter 1: Introduction

Chapter 2: Gross Domestic Product

The Expenditure Approach

The Output Method

The Income Method

GNP vs. GDP

Release Schedule

Trend Growth

The Business Cycle

Monetary Conditions Index

Effects of Monetary Policy on GDP

Effects of the Exchange Rate on GDP

Exchange-Rate Deflators

Chapter 3: Coincident Indicators

PMI Surveys

Industrial Production

Chapter 4: Leading Indicators

Financial Conditions Index

The U.S. Business Cycle

ZEW Survey

Ifo Survey

M1 Money Supply Growth

Chapter 5: Inflation Measures

Consumer Price Index

Producer Price Index

Labor Costs

Money Supply

Inflation Expectations

Chapter 6: The European Central Bank

Traffic Light System

Mandate

Two-Pillar Strategy

Monetary Policy Implementation

Intervention in the Currency Markets

Taylor Rule

Chapter 7: Other Institutions

Council of the European Union

European Parliament

European Commission

Ecofin

Eurogroup

European Council

Chapter 8: Euro Crisis

Origins

Optimal Currency Area Theory

Fiscal Consolidation

Quantitative and Qualitative Easing

Government Bond Purchases

Measures of National Solvency

Target2 Balances

Resolution

Departure from the Euro Area

Tools for Analyzing Debt Sustainability

Chapter 9: Germany

Labor Market

Political Institutions

Political Parties

Chapter 10: France

Chapter 11: United Kingdom

The Bank of England

Quantitative Easing

GDP

Inflation Measures

House Prices

Political Institutions

Chapter 12: Switzerland

The Swiss National Bank

KOF Leading Indicator

Chapter 13: Sweden

Chapter 14: Norway

Bibliography

Index

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Library of Congress Cataloging-in-Publication Data

Powell, David J., 1980-

The trader’s guide to the euro area : economic indicators, the ECB and the euro crisis / David J. Powell.

pages cm

Includes bibliographical references and index.

ISBN 978-1-118-44005-6 (cloth)

1. Investments—European Union countries. 2. Eurozone. 3. Finance—European Union countries. 4. Financial crises—European Union countries. 5. Economic indicators—European Union countries. 6. European Union countries—Economic conditions. I. Title.

HG5430.5.A3P69 2013

330.94—dc23

2013022398

A catalogue record for this book is available from the British Library.

ISBN 978-1-118-44005-6 (hbk) ISBN 978-1-118-44003-2 (ebk)

ISBN 978-1-118-44002-5 (ebk) ISBN 978-1-118-44004-9 (ebk)

Acknowledgements

Few goals in life can be achieved without the support of other people. This book is no exception.

I am indebted to David Hauner. He always found time to share his expertise. His wife, Manuela Doeller-Hauner, was responsible for the most enjoyable of these discussions through her gracious hospitality.

The book also greatly benefited from the generosity and intellect of Holger Schmieding. He thoroughly read the manuscript, provided detailed feedback and pointed out many inaccuracies.

Mike Rosenberg provided valuable comments as well. I read Mike’s classic book, Exchange-Rate Determination, the year I finished graduate school and at the time never thought I would have the honor of him editing my own.

I would like to thank a few colleagues at Bloomberg. This book would never have come to fruition without the support and approval of Ted Merz, Brian Rooney and JP Zammitt. In addition, I am grateful to Rich Yamarone for having introduced me to the editors at Wiley and to Chris Kirkham for his help in the editing process.

I am also grateful to many acquaintances, colleagues – former and present – and friends who provided hours of useful discussion in the years before I started working on this book and during the writing process. The list includes Landé Abisogun, Colin Asher, Riccardo Barbieri, Kurt Bayer, Joe Brusuelas, Marc Chandler, Bob Lawrie, Mike McDonough, Niraj Shah and Bob Sinche.

I would also like to thank the people who granted permission to reproduce some of their work or quotes. The list includes Willem Buiter, Paul De Grauwe, Thomas Mayer, Gilles Moec, Jim O’Neill, Erik Nielsen, Lucrezia Reichlin and Huw Worthington.

I am grateful to the staff of the Ifo Institute as well. Hans-Werner Sinn provided some helpful remarks on the section on the euro crisis. Klaus Wohlrabe kindly reviewed the section on the Ifo Survey. Wolfgang Nierhaus and Wolfgang Ruppert granted permission to reproduce some of their work. I also appreciate the assistance of Sigrid Stallhofer.

I would like to express appreciation to my parents, Carol Powell and Michael Powell. Their commitment to my education provided the foundation for this book.

I would like to acknowledge a few friends from my hometown of Cold Spring, New York. Alix, Bob, Juliette and Marie-Claude Morgan kindly hosted me at their summer home in France when I was completing the research for this book. Greg Highlen provided helpful comments during the writing process.

Lastly, I would also like to acknowledge a few individuals who provided support during my formative years and were crucial to my intellectual development. They are: the late John Mills, his wife, Margaret Mills, and the late Margaret Mudd.

Chapter 1

Introduction

The euro area remains in a state of flux and appears to be unsustainable in its present form. The outcome of the crisis may be unknown for years and a judgment on the project’s success or failure may be out of reach for decades.

In the meantime, analysts, portfolio managers and traders will still have daily, weekly, quarterly and annual benchmarks. They will have to analyze economic developments in the euro area and their impacts on financial assets. The objective of this book is to provide a framework for that analysis that is comprehensible to most financial market participants.

The book begins with a focus on coincident and leading economic indicators for the euro area. The former furnish information on the state of the economy and the latter signal the future directions of those coincident indicators. Leading indicators, therefore, often attract the most attention in the financial markets.

Klaus Abberger and Wolfgang Nierhaus, economists at the Ifo Institute in Munich, have defined the characteristics of a good leading indicator. They have written, “The characteristic of a good indicator is that it signals turning points in economic activity in a timely and clear fashion (i.e. without false alarms). In addition the lead of the indicator should be stable so that a relatively reliable estimate can be made as to how early the signal of the indicator occurs. Finally, the results should be available in a timely manner and not subject to any major revisions after publication.”1

Unfortunately, no indicator exists that perfectly fits that description and an analyst should therefore have a broad-based view and needs to watch a variety of indicators. That’s the method of most economists. Alan Blinder, former vice chairman of the Board of Governors of the Federal Reserve System, said his approach while at the central bank was relatively simple: “Use a wide variety of models and don’t ever trust any one of them too much.”2

Mervyn King, former governor of the Bank of England, delivered a similar message: “The wealth and diversity of published labour statistics means it is rare for them all to point in the same direction. The MPC’s analysis of the labour market is like the construction of a jigsaw puzzle. The pieces of data are assessed alongside each other in order to build up as clear a picture as possible. No single piece of data is interpreted in isolation. And no single piece of data is, in itself, decisive.”3 One could easily say the same thing about the economy as a whole.

Subsequent chapters attempt to provide an explanation of euro-area institutions. The region, with 17 central bank governors, 17 finance ministers and 17 heads of government as well as countless policy makers in Brussels, has become increasingly difficult to understand without knowledge of the roles of those bodies.

Chapter 8 focuses on the euro crisis. It attempts to provide an explanation of its origins and a glimpse of the potential outcomes. In addition, the tools needed to analyze the crisis as it evolves are presented. No one knows exactly how the crisis will end and financial market participants need to be armed with the appropriate instruments to understand the latest developments.

The views of some of the most widely-quoted economists – Willem Buiter, David Blanchflower, Paul De Grauwe, Barry Eichengreen, Milton Friedman, Paul Krugman, Thomas Mayer, Carmen Reinhart, Kenneth Rogoff and Hans-Werner Sinn – are frequently cited. Their insights into the debacle have been unparalleled, though some of the arguments may have shifted with time. The views of most economists are constantly evolving along with the events of the debt crisis. As John Maynard Keynes quipped, “When the facts change, I change my mind. What do you do, sir?”

The remaining chapters provide information unique to the economies of Germany, France, the U.K., Switzerland, Sweden and Norway. These countries have many of the same economic indicators – gross domestic product, industrial production, purchasing manager indices, etc. – as the euro area. These data points are basically the same for those countries as for the euro area as a whole, though some details may differ. A second review of the indicators for the individual countries is avoided.

The reality is no one – not even the best economists – can see into the future. All anyone can do is make the best decisions possible based on a set of incomplete information. The best way to be armed for that decision-making process, despite its flaws and incompleteness, may be to understand the present state of the economy and the political debate as fully as possible.

1Abberger, Klaus and Nierhaus, Wolfgang The Ifo Business Cycle Clock: Circular Correlation with the Real GDP. CESIfo Working Paper No. 3179, Ifo Institute, 2010.

2Blinder, Alan Central Banking in Theory and Practice. Cambridge, Mass.: MIT Press, 1998.

3King, Mervyn “Employment Policy Institute’s Fourth Annual Lecture.” Bank of England, December 1, 1998. {http://www.bankofengland.co.uk/publications/Pages/speeches/1998/speech29.aspx}

Chapter 2

Gross Domestic Product

GDP is the most commonly cited comprehensive indicator of economic activity. It is the total market value of the goods and services produced within a nation or, in the case of the euro area, a monetary union. It can also be described as the total income of the geographic area.

The first word of the term – gross – indicates that depreciation of equipment and factories used in the production process is excluded from the calculation.1 For example, the decline in the value of an aging computer is ignored in this measure of national output.

The second word of the term – domestic – indicates the inclusion of all production within the region’s borders irrespective of the country of origin of the producer.2 For example, if a Mercedes is produced in a plant constructed by the German company in the U.S., the car is included in U.S. GDP and excluded from German GDP. If the car is produced in Germany and shipped to the U.S., it is included in German GDP and excluded from U.S. GDP.

Three methods of measuring GDP exist: expenditure, output and income. In theory, all three methods should produce the same figure. In practice, measurement problems normally lead to discrepancies.

The Expenditure Approach

The expenditure approach is based on the final or end use of the produced goods and services. This method has historically been used most frequently by national statistical agencies. In a report from 1996 of 18 member countries, the OECD calculated that all of them reported GDP using the expenditure approach. Sixteen of them also tallied the figure using the output method and 10 used the income approach as well. These numbers have since risen to 18, 17 and 16, respectively.