ZEW Indexes Edge Higher; But What Does It All Mean?

The ZEW survey improved as U.S., German and EMU current conditions and macroeconomic expectations (where surveyed) all increased on a month-to-month basis.

Table 1 summarizes the shift with the TEXT reflecting month-to-month changes. On that basis, there were improvements (increased strength) in 15 of 16 surveyed metrics. However, the text COLOR reflects the relative value of the underlying queue ranking series. Only two queue rankings in the table, the U.S. economic situation and German economic expectations in April are above their respective historic medians on data back to 1992 (and, hence, print black in the table). This means most series are still quite weak and, while improving month-to-month, still emerging from sub-normal conditions.

Table 2 presents the queue rankings by categories as well as the month-to-month changes in the underlying diffusion readings.

As noted above, only one metric was weaker month-to-month; that was the expectation for short-term interest rates in the EMU. A rate cut is widely expected from the ECB in June. While inflation expectations rose month-to-month, the percentile standings for inflation are still extremely weak. Long-term rate expectations continue to have very low diffusion values as well even though they have crept higher this month.

Stock market expectations remain depressed. The U.S. expectation is the best of the lot with a 20-percentile standing- a standing that is higher 80% of the time. From that, it is clear what these readings mean. Conditions in the U.S. and Europe remain very weak. Yes, there was ‘broad’ improvement this past month but improvement of a miniscule sort. Despite ongoing historically low interest rates, no one is really impressed that these economies are going to be fired up by these low interest rates as the weak stock assessments show you. Or, maybe the trouble is that growth is going to be okay, but stocks are just overpriced and too high-valued?

Despite strong job growth in the U.S. and a stock market ‘priced for perfection’ (well, that’s part of the problem, in the U.S., isn’t it?), in Washington we have Joe Biden trying to convince everyone that the economy is great! But at the Fed, we have concerns that the economy is on the verge of needing rate cuts to sustain itself and the current low (near a 50-year low) rate of unemployment. What a peculiar period! It does not seem that we have much in the macroeconomic environment that people, investors, and policymakers, including central bankers can agree on. Everything in the U.S. is and has been about spin for some time now. Truth is playing hide-and-go-seek with politics. The beat goes on...