Most ZEW Metrics Backtrack in October

The ZEW survey in October is little changed from the views offered in recent months. The macroeconomic assessment for October shows a relatively sharp deterioration in the euro area, a minor monthly deterioration in Germany, and a small amount of progress in the United States, according to the surveyed experts. Averaged three-month, six-month and 12-month data show the euro area largely unchanged in its negative assessment. Germany is assessed as progressively worse while the U.S. progresses to minor improvement in six-months compared to 12-months and in three-months compared to six-months. Assessed based on their queue data standing, the U.S. has the stronger economic situation at a 42-percentile standing, the euro area has a 30-percentile standing, while Germany has a much weaker 13-percentile standing. All of these are below the 50% mark that registers the median value for each individual sovereign area.

Macro-expectations Macroeconomic expectations for the U.S. and Germany find negative expectations in October for both but an improvement in Germany against a deterioration in the United States; both in magnitude of about 10 points (plus for one minus for the other). The averages from 12-months to six-months to three-months show Germany deteriorating to slightly weaker conditions over three and six months. The U.S. gives erratic but consistently negative and slightly more deeply negative readings than in Germany at least based on average diffusion readings. However, the ranking of the October German figure is only slightly higher at 25.8% than the ranking of the U.S. figure at 24.4%. Both reside at or near the bottom 25-percentile in their historic queue of data.

Inflation expectations Inflation expectations fell in the euro area, Germany, and the United States at a time that inflation is excessive in all regions relative to target, indicating that inflation reduction progress is still in gear and progressing more rapidly than it was a month ago. However, on averaged 12-months to 6-months to 3-months data, the metrics all have taken on slightly stronger readings indicating that in the big picture inflation reduction is occurring but that the expected pace of progress may be slowing down.

Monetary policy As for monetary policy, short-term interest rate expectations in the U.S. have gone flat at zero while in the EMU region, there is a sharp reduction in the average diffusion value indicating that some rate hikes are still expected but fewer than before. Both the U.S. and euro area 12-month to 6-month to 3-month averages show steady and large reductions in value, sequentially.

Long-term rate expectations Interestingly, long-term rate expectations turned negative in Germany compared to earlier months while, in the U.S., the reading retained its ongoing negative diffusion value. Recently bond yields have moved higher, contrary to these survey expectations. The progression for averages from 12-months to six-months to three-months shows a steady significant reduction in long-term rate expectations transitioning from positive readings over 12 months to negative readings over three months in both the U.S. and Germany.

Stock market expectations Stock market expectations largely weakened. In the case of Germany, the weakening was slight. The U.S. and the euro area showed sharper reductions in their diffusion indexes that nonetheless remained positive in October. Sequential values show little evidence of changed momentum in any direction.

Summing up On balance, the ZEW experts see weaker conditions broadly with a few expectations. The levels of the readings on growth and growth expectations are still extremely low. Inflation progress is in gear and expected to continue and perhaps at a slightly reduced pace. Short-term interest rate expectations show little evidence of much change- none in the U.S.; some further small rate hikes seem to be expected in the EMU. The ZEW experts, seeing inflation coming down, do not see any further increase in long-term rates. Instead, they see long-term rates deflating, amid weaker expectations for stocks. A survey of the respective queue standings in the table reveals ongoing weakness everywhere on all measures. The weakness for inflation refers to expected future conditions; therefore, reflecting expected inflation progress. Current growth is handicapped as weak with expectations also weak. There is no magic in the ZEW experts’ outlook this month, just more of the same.