EU - Common Economic Statistics

Minimum Bid Rate

The rate at which the European Central Bank (ECB) charges banks in EU member states to borrow money. The minimum bid rate is an important tool in the ECB’s monetary policy and changes in this rate affect other interest rates in the EU banking system. The ECB reviews the minimum bid rate twice a month and a change in the rate could be announced at either of the bi-weekly meetings. Any change in the rate has a major impact on both the value of the euro and other interest rates.

A cut in the Minimum Bid Rate is a clear indication that the ECB feels that action must be taken to encourage spending to give the economy a boost. By reducing the cost of borrowing money in this manner, lending institutions can lower commercial loan rates for businesses and consumers – the goal in this case is to encourage spending. However, if the ECB is concerned with inflationary pressures becoming too great, expect the Bank to increase the Minimum Bid Rate. This makes it more costly to borrow money which could cause businesses and individual consumers to delay major spending initiatives in the hopes that lending rates will ease in the near future.

The currency markets are especially susceptible to changes in interest rates and the euro tends to react immediately in response to actions taken by the European Central Bank. As interest rates climb, so typically does demand for the currency as investors can secure higher returns when compared to other currencies. Of course, the opposite is true when interest rates are cut; in this case, investors tend to reduce their euro holdings and this extra supply on the markets leads to a fall in the value of the euro.

Euro Overnight Index Average

Known as the EONIA, the Euro Overnight Index Average is the weighted average of the overnight interest rate charged for unsecured loans provided through the EU overnight bank lending system. Together with the European Union Inter-Bank Offered Rate, it makes up the two primary short-term interest rate benchmarks that influence most other EU interest rates including commercial lending rates offered by financial institutions.

The EONIA is the rate at which banks offer overnight loans to other banks within the European Union banking system. This overnight lending market ensures that banks with a temporary shortage of cash can easily and affordably borrow from other banks with a temporary surplus of cash. This arrangement benefits both the borrower and the lender as the borrower – in order to meet end-of-day settlements for instance – need not liquidate assets in order to meet temporary cash shortages; for the lender, there is the opportunity to earn interest on cash surpluses that otherwise would not be generating appreciable revenue.

Euro Interbank Offered Rate

The Euro Interbank Offered Rate – or EURIBOR – is the average rate for large interbank term deposits offered by European Union member banks to other financial institutions in the EU banking system. EURIBOR rates are also used as a reference rate for forward rate agreements and interest rate swaps denominated in the euro.

First introduced in December of 1999 by the European Banking Federation, the EURIBOR is the trend-setting rate for large euro money market transactions. By taking the average rate offered for major transactions that take place in the money markets, the EUROBAR serves as a reference rate for commercial interest rates making it a very important indicator for investors to watch.

EURIBOR rates are also used as a reference for forward rate agreements (FRAs) and interest rate swaps. A forward rate agreement (FRA) is a derivatives-based financial instrument in which one party (the buyer or borrower) agrees to pay a fixed interest rate to another party (the seller or the lender). The fixed rate is calculated for a specified notional amount (i.e. the principal) that is owned and held by the seller of the FRA. In return for payment of the fixed rate at the end of the agreement, the buyer receives the proceeds the notional amount earns for the time period based on the floating reference rate – in this case, the EURIBOR rate.

Interest rate swaps are handled in a similar fashion - a basic swap is simply an agreement whereby two counterparties agree to exchange (i.e. “swap”) the accrued interest on a set notional amount (the principal), in exchange for an agreed upon fixed interest rate for a specified time period. Each side of the swap is referred to as a leg, where one leg is tied to a floating market return (such as the EURIBOR) while the other leg is fixed to an agreed-upon rate.

Marginal Lending Rate

The interest rate charged to financial institutions borrowing money in the European Union banking system. National Central Banks within the Eurozone commonly provide overnight and other short-term loans to the region’s commercial banks.

The Marginal Lending Rate is the main benchmark interest rate in the Eurosystem banking industry as it represents the rate charged to banks that must seek additional cash on a short-term basis. The European Central Bank uses this rate to influence other interest rates in the Eurosystem as a change in the marginal lending rate generally results in a corresponding adjustment to commercial lending rates.

Deposit Rate

The rate to financial institutions with deposits held by any National Central Bank within the European Union banking system. This is an important benchmark rate as the European Central Bank can influence commercial rates by raising or lowering the deposit rate.

Interest rates have a direct influence on currency rates as investors and the currency markets are especially susceptible to changes in interest rates. As interest rates climb, so typically does demand for the currency as investors can secure higher returns when compared to other currencies. Of course, the opposite is true when interest rates are cut; in this case, investors tend to reduce their Euro holdings and this extra supply on the markets leads to a fall in the value of the Euro.

EURIBOR Yield Curve

The Euro Inter-Bank Offered Rate (EURIBOR) is the average of the interest rates offered on unsecured, overnight loans between banks participating in the EU banking system. This yield curve shows the projected EURIBOR rates for various terms and is used extensively as the reference rate for forward rate agreement (FRA) contracts.

First introduced in December of 1999 by the European Banking Federation, the EURIBOR is the trend-setting rate for large euro money market transactions. By taking the average rate offered for major transactions that take place in the money markets, the EUROBAR serves as a reference rate for commercial interest rates making it a very important indicator for investors to watch.

EUROBAR rates are also used as a reference for forward rate agreements (FRAs) and interest rate swaps in a similar fashion to LIBOR-denominated transactions. A forward rate agreement (FRA) is a derivatives-based financial instrument in which one party (the buyer or borrower) agrees to pay a fixed interest rate to another party (the seller or the lender). The fixed rate is calculated for a specified notional amount (i.e. the principal) that is owned and held by the seller of the FRA. In return for payment of the fixed rate, the buyer receives the proceeds the notional amount earns based on the floating reference rate – in this case, the EURIBOR rate.

Interest rate swaps are handled in a similar fashion - a basic swap is simply an agreement whereby two counterparties agree to exchange (i.e. “swap”) the accrued interest on a set notional amount (the principal), in exchange for an agreed upon fixed interest rate for a specified time period. Each side of the swap is referred to as a leg, where one leg is tied to a floating market return (such as the EURIBOR) while the other leg is fixed to an agreed-upon rate.

Yield Curve

The yield curve plots the return on fixed income instruments. The shape of the curve illustrates the relationship between expected yields and time to maturity. In the European Union, the Minimum Bid Rate is the reference rate for short-term interest rates and yields on new domestic bond issues reflect changes to this rate.

Bond yields are based on the duration of the bond (i.e. the time to maturity) and the creditworthiness of the issuer. In order to attract investors, non-government bond issuers must offer a higher return as these securities carry greater risks than bonds backed by the government and investors expect some form of premium in return for accepting the additional risk.

Long-term bonds are also at risk of losing value through a diminishing of the liquidity spread. This term refers to the difference between the bond yield and short-term interest rates. As interest rates rise, the locked-in yield of a bond becomes less valuable as it does not adjust higher to compensate for the rising interest rates, thereby reducing the true value of the return. If short-term interest rates rise above the yield, the investor actually has a negative liquidity spread.

Normal Yield Curve

A so-called “normal” yield curve is one that curves upwards in a concave manner. This indicates an increase in the yield (the x axis) as time to maturity (the y axis) increases. This follows the tenant of the Arbitrage Pricing Theory that states that the longer the term to maturity, the higher the yield. This approach rewards investors willing to lock their money into long-term bonds despite the increased risks noted earlier.

Flat Curve

A flat yield curve results when the yields are basically the same for all maturities. This indicates that investors are willing to accept yields on long-term instruments that do not include a premium above current short term yields. Investors would only accept this if they feel that the economy has little capacity for growth combined with the likelihood that interest rates will not rise.

Inverted Yield Curve

An inverted yield curve that slopes downwards over time indicates a negative outlook for the market in the long term and could suggest the onset of a prolonged economic downturn or possible recession. An inverted yield curve shows even greater long term pessimism than a flat curve – so much so that long-term bond yields actually fall below short-term yields (negative liquidity spread). The implication is that investors are willing to lock in investments at the current rate in the belief that yields will continue to fall in the face of a worsening economy.

Humped Curve

A “humped” curve occurs when both short and long tem yields are equal but medium term yields are higher. This could indicate an expectation that the economy may be entering a period of growth but this growth is not expected to be sustained for the long term.

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Real GDP Versus Nominal GDP

When the value of goods and services from one time period is compared to another, changes in the inflation rate can account for some of the difference between multiple GDP results. In order to make it clear whether or not inflation has been factored in, economists use the term Real GDP to indicate GDP results that have been adjusted for inflation. This is the approach that best enables economists to determine if the economy has increased or contracted when compared to previous results.

GDP figures that have not been adjusted are usually referred to as Nominal or Current Dollar GDP amounts.

Gross Domestic Product (Change)

Gross Domestic Product (GDP) is the total value of all goods and services produced within the borders of a country for a given period of time. Everything produced in the country is counted without regard to the nationality of ownership of the firms producing the goods – in short, if it is produced within the country’s borders, it is counted as part of the GDP. This chart shows the percent change in GDP from the preceding quarter.

An increase in GDP is seen as a positive indicator suggesting that the economy is growing. This often results in increased demand for the dollar and could see an increase in value in the FX markets. As the value of a country’s production increases, then a corresponding increase in the workforce likely results which suggests greater employment and higher incomes.

There are shortcomings in this assumption however, as volunteer work is not included in the basic GDP calculation; nor is work performed in the so-called underground economy. In this case, work done “under the table” or in exchange for other goods or services is not part of the GDP results.

Unemployment Rate

The percentage of individuals eligible for work and are currently looking for employment but unable to secure a position. Rising unemployment is a negative indicator that foreshadows a probable reduction in consumer spending.

For this report, the term unemployed refers to individuals of working age who did not receive payment for work-related or self-employment activities during the survey period. Also, the individual must have been available for work during this time and must have been actively looking for employment.

Students and homemakers, as well as others engaged in full-time pursuits not traditionally considered a typical wage-earning activity, are also considered unemployed if they meet the conditions of the definition above. In other words, a student of working age not currently employed but looking for work may be regarded as unemployed.

The obvious impact of rising unemployment is a decline in consumer spending due to a reduction in wages earned. Add to this the fact that workers who are employed but feeling vulnerable with respect to their continued employment typically reduce their spending in a bid to boost savings to prepare for possible job loss. This behavior further reduces consumer spending and can actually fuel additional layoffs.

Employment Change

Tracks changes in the unemployment rate on a quarterly basis. Rising unemployment is a negative indicator that foreshadows a probable reduction in consumer spending. Also, workers who feel their positions may be vulnerable may reduce their spending to boost savings to see them through a period of unemployment. For these reasons, employment levels are viewed as an important economic indicator.

Labour Cost Index

Quarterly index report that measures the average hourly labour costs derived from a survey of a representative sample of businesses in the European Union. Includes direct employee compensation in the form of wages and salaries, employee benefits paid by the employer, and bonuses or allowances not normally paid as part of the regular pay period.

Retail Sales

Provides feedback on consumer spending and is one of the first sales reports available each month. Tracks spending on consumer goods exclusively but does not include expenditures on services such as health care and education. An increase in retail sales has a positive effect on the currency as it shows growth in the country’s economy.

The Retail Sales report is published without accounting for inflation, so to get a true measure of real change in retail spending, you must adjust accordingly. It is not uncommon for the sales report to undergo significant revisions even after it is released as compiling accurate and complete retails sales data can be very difficult due to the number of contributors that supply the retail sales figures for inclusion in the report.

Industrial Production

Measures the production of the manufacturing, mining, and energy supply industries. An increase from the previous period is seen as a positive indicator confirming growth in the economy. This usually supports the value of the native currency in the currency markets.

The industries included in this category are integral to the region’s overall economy. A large segment of the population are employed in these sectors so continued growth bodes well for continuing employment. As an economic indicator, Industrial Production is particularly effective as these industries respond in a very predictable manner in response to changes in the economy. When the economy is growing for instance, consumer demand for manufactured goods typically rises as do energy requirements to power additional factories and facilities. During a downturn, consumer demand for durable goods retreats and this is reflected almost immediately in a drop in manufacturing and energy needs.

Consumer Price Index

The Consumer Price Index (CPI) is considered one of the most effective measures of inflation within an economy. Inflation is a necessary part of economic growth, but inflation exceeding 2% is generally seen as detrimental due to the erosion of the buying power of the nation’s currency. When high inflation becomes a concern, investors abandon the currency in search of other investment options thus lowering the demand for the nation’s currency.

CPI is a consumer-level analysis of the cost to buy a set basket of goods and services and is based on a starting index value of 100. If the CPI for the current period is 112 for instance, it means that it now costs 12% more to buy the same basket of goods today than it did when the index was first established. By comparing the monthly CPI data, you can easily detect changes in consumer buying power from month to month.

Producer Price Index

The Producer Price Index (PPI) measures the change in prices that producers receive for their products on a month by month basis. A rising PPI is seen as a positive growth indicator which often leads to greater demand for the currency.

Like the Consumer Price Index, the PPI compares the current price index to a base value of 100 – this means that a PPI value of 115 is 15% higher than the original base. Data is retrieved using surveys from various sectors including manufacturing, agriculture, mining, and utilities.

A rising PPI shows increased capacity for consumers to purchase goods. Therefore, a PPI increase within acceptable inflation and growth levels shows healthy economic expansion and this tends to increase demand for the nation’s currency. Producers can continue to meet sales and production targets and this suggests continued employment levels. However, a PPI increase that exceeds acceptable growth levels could be a sign of inflation creeping into the economy.

Trade Balance

Compares the total value of imports and the total value of exports for the reporting period. A negative value indicates that more goods were imported than were exported (trade deficit) – conversely, a positive trade balance means that exports exceeded imports (trade surplus). This report is used by currency investors to determine demand for the dollar.

In the case of a trade surplus or a decreasing trade deficit from the previous month, it naturally follows that countries importing goods must convert their currency to the domestic currency of the country supplying the goods. This results in an increased demand for the domestic currency thereby increasing its value.

In the case of a trade deficit or a trend towards a decreasing trade surplus, the importing country must convert more of their currency to the currency of the country from which they are buying goods. This leads to an increased supply of the domestic currency on the FX markets which could cause the domestic currency to lose value against other currencies.

Current Account

Shows the total inflow of new capital into a country. It is calculated as the total Trade Balance (exports minus imports), plus the net of income payments (interest and dividends), plus all unilateral transfers (foreign aid, taxes, and one-way gifts).

If the resulting number is positive, it shows a Current Account surplus; a negative value is a Current Account deficit. Note that a deficit means that more money left the country than entered the country in the form of exports and other transfers.