U.S. industrial production is beating the Eurozone
The Eurozone manufacturing numbers released on Monday don’t lend themselves to optimism. France printed at 48.4, which signals contraction, as it’s below 50. Germany and Italy fared better, with prints of 51.4 and 52.7, respectively. Although these countries are expanding, industrial production is lagging the U.S., which came out with a PMI reading of 54.7.
The divergence is one of the drivers of U.S. equity outperformance over European equities in the past year. That isn’t to say that European equities haven’t done well, being up about 19% year to date, but U.S. equities are up 28% in the same period.
PPI numbers show the ECB isn’t doing a good job managing demand
The main purpose of a central bank is to manage aggregate demand, or the rate of growth, and future expectations of nominal GDP (or nominal income—they’re the same thing). The PPI (Producer Price Index) shrunk -1.4% year-over-year in October, showing that the European Central Bank is doing a bad job ensuring price stability (generally considered 2% annual inflation). This is the second driver of the relative underperformance between European and American stocks this year. The Fed seems much more concerned about its impact on the markets and the economy than the ECB does.
The impact on investing is that, on a macro basis, there are more reasons to be long U.S. stocks than EU stocks. Although the ECB cut rates recently and could again, its mismanagement of expectations makes it hard to favor buying ETFs such as the Vanguard MSCI Europe ETF (VGK) or the SPDR EURO STOXX 50 ETF (FEZ)
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