ZEW Divergence!!

The current macroeconomic situation The assessments of the ZEW experts on current macroeconomic conditions show conditions moving in opposite directions in the United States versus Germany and Europe. In February, U.S. conditions are improving as the economic situation moves up sharply to a reading of 34.0 from the previous reading of 15.3. For Germany, conditions worsen from a January rating of -77.3 to a reading of -81.7 in February. For the euro area, conditions do improve slightly, moving from -59.3 in January to -53.4 in February. However, the chart shows that broadly, conditions in the U.S. are moving up sharply as conditions in Germany and Europe have been deteriorating even with the euro area making a small move toward better conditions in February.

Expectations Expectations in Germany, however, improved slightly, moving up to 19.9 in February from 15.2 in January. In the U.S., there's a small improvement in expectations from -8.3 in January to -6.1 in February.

Rankings for the diffusion metrics In terms of rankings, the queue positioning of the U.S. and Germany on these two important macroeconomic statistics are quite different. The U.S. has an economic situation that ranks in its 51st percentile, above its historic median. Germany’s queue percentile reading is in its 9.6 percentile and the euro area reading is in its 30th percentile for the economic situation. In terms of expectations, the German expectation is higher at its 49th percentile, near its median standing, while U.S. expectations stand at their 40th percentile, still below their median. U.S. economic performance may be strong and trending higher, but expectations are not hitched to that rising star.

Inflation is subdued Inflation expectations are still low everywhere; they weaken in the euro area and in Germany. Expectations for inflation rise slightly in the U.S. to -58.6 in February from -64.6 in January. However, these are diffusion indexes that, in these ranges, don't have a lot of meaning, since the U.S. ranking for inflation expectations is in its lower 5-percentile, for Germany it's in the lower 9.6 percentile, and for the euro area expectations are in their lower 6-percentile. All these are very weak readings for inflation expectations. The ZEW experts continue to believe inflation is under control.

Interest rates For interest rates the readings for both the euro area and the U.S. weakened as in both areas the ZEW experts are looking for easier monetary policy. The readings for long-term interest rates also eased to lower levels as well in the U.S. and Germany. And for the U.S. and the euro area and monetary policy as well as for the U.S. and Germany for longer term interest rates, all the rankings run in their lower 10-percentile, continuing the outlook for low rates.

Summing up The big news in the ZEW survey this month is really the split in the assessment of current conditions with U.S. macroeconomic conditions seen as improving sharply while Germany is deteriorating, and Europe is being dragged lower along with Germany. Expectations for continued easing and lowering interest rates are still in force for both the U.S. and the euro area. There have been no significant changes in the outlook for inflation.