German Zew Index Shows a Pulse but Remains Weak

The Zew reading from the survey of financial experts in Germany produces a view of a weaker economic situation in the Euro-Area and in Germany but with some improvement in the United States. The degree of improvement is small for the US and the deterioration is small for Germany. The index ranking falls to -93.1 from -91.4 for Germany, however, for the Euro-Area the setback is considerably larger to a reading of -55.0 from a reading of -43.8 in November. As a result of these shifts on the month, the queue percentile standing for the Euro-Area has slipped to 27.9%, Germany remains extremely weak at a 2.7 percentile reading, while the US reading stands much stronger, at 48.2% just below its historic median which occurs at a ranking of 50%.

Expectation assessments for Germany and the US show opposite movements with Germany moving up to 15.7 from 7.4 in November while the US slips back to 8.9 in December from 13.3 in November. The expectations readings are not as depressed on a ranking basis as the current statistics are, with Germany moving up to a 44.4-percentile standing and the US slipping back to a 58.1-percentile standing. The US ranking is still above its historic median reading. Improvement for Germany brings the December reading up close to its six-month average and above its three-month average.

Inflation expectations continue to fall in the Euro-Area and in Germany. In the Euro-Area the fall is relatively sharp to a reading of -23.9 from -13.4 in November; for Germany it's a fall to -25.7 in December from -14.7 in November. The US sees an increase in inflation expectation to plus 12.6 in December from plus 2.7 in November, giving it two straight months of net positive readings on inflation expectations. The queue standings for the period put Euro-Area expectations at a 19-percentile standing, with Germany close by at an 18.1 percentile standing, compared to the US at a 29.6 percentile standing. All of these are below their historic medians, but the US clearly is showing more of a tendency toward inflation in the view of the Zew financial experts.

Short term interest rate expectations have weakened in the Euro-Area as they have moved up in the United States, which is what you would expect with the shifts in inflation expectations that have been recorded by the Zew experts. The Euro-Area has a ranking of current short term rate expectations at 1.1%, an extremely low ranking, while in the US has short term rate expectations only at 6%, still extremely low.

Long term rate expectations for Germany have strengthened to a diffusion reading of -3.2 from a reading of -13.3 and for the US they've strengthened more sharply moving into positive territory at +11.4 up from -0.6 in November. The long-term rate expectations for Germany have a 10.7-percentile standing, while for the US the standing is approximately double at 20.5-percentile. Both of these, of course, are still quite low and well below their historic medians that would occur at a ranking of 50%.

Stock market expectations produce positive diffusion readings across the board but a weakening ranking for the Euro-Area, for Germany, and for the US. While the US has the strongest net diffusion reading and the strongest ranking, it also has the largest step back from November to December as US stock market expectations fall to 31.9 from 53.5. In the case of Germany, they fall to 13.3 from 17.8; for the Euro-Area stock market expectations dropped to 16.5 from 21.9. The Euro-Area ranks at 10.9 percentile, with Germany at the 8.2-percentile level, they compare badly to the US at a ranking of 56.4 percentile, above its historic median.

The Euro-Area reading is continuing to be quite weak, while U.S. data have been stronger, and we see this reflected in exchange rate movements with the dollar firming. However, economies don't simply move in a linear fashion and while US retail sales recorded on Tuesday, we're quite a bit stronger than expected US industrial production for November unexpectedly stepped back, keeping the US manufacturing sector on the same week footing that we continue to see reported globally. That weakness was well demonstrated in the S&P manufacturing PMIs as reported yesterday. The global economy continues to struggle and to be supported by its services sector.