Zew Current Situation Remains Dour

The German research house Zew has updated its monthly poll of members which shows little change in current conditions, some small improvement in still very-weak expectations, perceptions that inflation is still well corralled, and the view that lower rates in the US are more likely, while less likely in the Euro-Area (but still very likely everywhere!).

Macro conditions and expectations Zew experts see no change in the current situation in the Euro-Area in June, a small step back for Germany and a step back in the US. Still, US conditions have a queue standing of 54.5%, above their historic median while the Euro-Area’s weaker standing is at its 41.2 percentile, Germany is still viewed as much weaker with a 15.9 percentile standing in its current conditions metric. Expectations reverse those queue standings as Europe improves expectations slightly in the month to a 69.3 percentile standing, well above its historic median. The US marks a 4.5-point improvement month-to-month but still logs a net negative assessment and sports a below-median queue standing in its 37.8 percentile.

Inflation and interest rates Inflation expectations remain deeply negative as inflation is broadly and intensely viewed as not a problem. The queue standings for the inflation readings range from a 7.4 percentile standing low in the US to a ‘high’ standing at 15.9% in Germany- the EMU reading is below the German reading. Not surprisingly, interest rate expectations are broadly negative across short- and long-term rates. Expectations for lower US short term rates rose this month while for EMU expectations were reduced. Still, we are splitting hairs here with 5-percentile and 6-percentile standings for each of them- both extremely low. Long-term rate expectations follow the same pattern, with lower US rates expected- not so for EMU. Both queue standings are exceptionally low at a three-percentile standing for EMU and at a 0.8 percentile standing for the US. We simply have rarely seen expectations so weak for long-term yield reduction in either the US or EMU.

Stock market expectations show below-median values for all three areas: EMU, Germany, and the US. The US queue standing evaluation is the highest at a still below-median 40-percentile standing while Germany and the Euro-Area had standings in their ‘teens.’

The current situation in EMU and Germany has remained depressed since Ukraine invasion. Europe and Germany came out of Covid with the same initial vigor as the US, but then both suffered relapses as the Russian war on Ukraine emerged. The US regather momentum to work higher from mid-2022 while Germany and EMU have been unable to mount a sustainable reaction. Inflation expectations have gradually ‘risen’ from deeply negative values and remain still very weak at large negative values. There have been no significant changes to interest rates or inflation expectations, just very slow-moving changes.

With central banks moving rates slowly no one seems to be expecting anything to change abruptly anytime soon. Perhaps if there is a sharp change in the works it will come from some unexpected geopolitical event, but even the shock attack on Israel by Hamas and the Israeli response have had minor impact on markets and on economic expectations...so far.