ZEW Macro Situation and Expectations Improve for U.S. and Germany

The tectonic plates did not shift under the feet of the ZEW forecasters in March. However, there was a small improvement in the economic situation and in macroeconomic expectations for both the United States and for Germany in the March ZEW survey.

The Eco-situation: The economic situation finds an improvement in Germany to -80.5 in March from -81.7 in February. This is still a highly negative reading and only a small improvement in the U.S. The economic situation reading in the U.S. rose to 37.9 from 34.0; for the euro area the current situation assessment worsened slightly to -54.8 from -53.4. Ranking these economic situation data back to the early 1990s shows the euro area ranking is in the slower 29th percentile, the German ranking is in its lower 11th percentile, and the U.S. ranking is above its median for the period; i.e., it is above a standing at 50, with a 55.3 percentile standing in March.

Macro-expectations: Macroeconomic expectations are assessed for Germany and the U.S., both show improvements in March although the German assessment at 31.7 improves much more than the U.S. assessment as the German assessment moves up from 19.9 in February. The U.S. assessment improves to -5.7 in March from -6.1 in February, a tiny move by comparison. The ranking for German expectations is above its historic median at a 58.6 percentile reading while the U.S. reading is only at a 41.1 percentile reading, moderately below its historic median. Obviously, current U.S. circumstances are much better than circumstances in Germany; however, the ZEW experts see more improvement in Germany ahead than in the U.S.

Inflation expectations: Inflation expectations tilted to continued low or declining inflation in the euro area and in Germany while in the U.S. the tilt moved slightly away from expectations of inflation declining as much. However, these month-to-month changes are minor and the queue standings for the outright assessments rather than the change for inflation put the euro area, Germany, and the U.S. all in the lower 10 percentile of their historic ranges- highly similar rankings.

Interest rate habitat: So, with inflation remaining low with little change in prospect, with the current economic situation weak - showing only marginal changes, and with macroeconomic expectations showing essentially moderate readings for the U.S. and Germany, although stronger readings for Germany, the ZEW experts continue to see interest rates remaining low.

Short-term rates: The month-to-month change for short-term interest rate expectations in the euro area fell to -80.3 in March from -65.0 in February, a considerable downshift. In the U.S., the reading fell to -78.3 from -71.1, still expecting a downshift in rates. The standing of these expectations puts both the U.S. and the euro area short-term rate expectations in the lower 5th percentile of their historic range.

Long-term rates: Long-term rate expectations are assessed for Germany and the U.S.; both show stepped up negative readings in March compared to February. The U.S. now has the lowest queue standing in this evaluation period. While the German standing has been lower only about 2.2% of the time. Declines in long-term interest rates are widely expected in both Germany and the U.S. and this is despite an above median standing for U.S. economic situation and a significantly improved macroeconomic expectation for Germany. This month, it's not exactly clear to me how the economic situation, macro-expectations, inflation expectations, and interest rate expectations fit together. There seems to be a little bit more dissonance among these readings than there has been in the past.

Part of this probably comes from my observation of current inflation numbers that show the actual declines in inflation slowing down. Growth is still relatively strong-to-solid in the United States. These observations make it hard for me to understand both the interest rate and the inflation expectations that the ZEW experts put forth for the United States.

Tectonic shifting- One place where the tectonic plates did shift is for stock market expectations. The euro area stock market expectation fell from 21.3 in February to 1.9 in March. In Germany, the expectation fell from 17.5 to -4.0. In the U.S., it fell from 18.8 to 7.3. These expectations leave Germany and the euro area with queue standings in their lower 2 1/2 percentile, while the U.S. has a standing at its lower 18th percentile. I would find it easier to deal with degraded expectations for inflation and interest rates than to see them appear for equities as they have in this survey but here, they are. We do have evidence that the ZEW experts are beginning to change their tune and their outlook for Europe and the United States. For now, these changes and their expectations still need to be fine-tuned as the experts need to digest changing economic circumstances, perhaps a new path for inflation, a change to the outlook for central bank behavior, and potentially a different look for growth for the period ahead.