ZEW Survey in September Shows Broad Weakening in Germany, U.S., and EMU

Most responses in this new survey for the euro area, Germany, and the United States show weakening month-to-month. Ten of the observations weaken month-to-month while six show strengthening. The variables that strengthened month-to-month were the assessment of the U.S. economic situation, economic expectations in Germany, and stock market expectations in the euro area, Germany, and the U.S. On the foreign exchange side, the dollar is expected to strengthen vs. the euro. We continue to see a weaker economic situation signaled in the euro area and in Germany. Economic expectations for the U.S. are weaker as economic expectations for Germany strengthen. The ZEW respondents are optimistic regarding inflation as they see it getting weaker in all three areas. As a result of this, short-term rate expectations are weaker in the euro area as well as in the U.S. Long-term interest rate expectations are weaker in Germany and in the U.S. And given that optimism on inflation behaving and interest rates falling, stock market expectations are stronger in all three areas.

Table 2 provides the underlying data showing the month-to-month changes in the diffusion indexes as well as the percentile standings for all the different measures in Table 1. There are only three measures with percentile standings above their 50% mark and two of them are barely above it; one is for stock expectations at 50.1% and the other is for foreign exchange expectations where the percentile standing is at 51.8% (favoring slightly a stronger dollar vs. euro). A more substantially strong reading is for short rates in the euro area with the 70.4 percentile standing, indicating that rate hike expectations exceed what they normally are by a substantial margin even though those expectations significantly fell month-to-month.

The economic situation is weak in all three areas with Germany having the weakest percentile standing at 13.4%, the euro area at 36.4%, and the U.S. at 40.3%. Economic expectations in Germany, while improved on the month, sit at a 17.5 percentile standing- quite weak; compared to Germany, the U.S. at a 36.2 percentile standing is still weak but over twice the reading for Germany.

Inflation expectations are low, and all three regions imply that inflation is expected to fall from its current levels.

Short-term interest expectations fall in both the U.S. and in the euro area. However, the euro area continues to have this very high expectation for short-rate expectations because the ECB still has a lot of work to do and interest rates are still well below the inflation rate there while in the U.S. the level of expectations is up to a 25.5 percentile area indicating that rate cuts rather than rate hikes are becoming the predominant point of view looking ahead.

Long-term interest rate expectations show both Germany and the U.S. with the expectations below the 15-percentile mark and both areas and showing sizable declines in those expectations on the month.

Stock market expectations improved in all three areas but only in the U.S. is the stock market assessment above its 50th percentile. In the euro area and in Germany, the queue standings are still extremely weak with poor expectations for the stock market to perform.

On balance, the ZEW experts see the current situation remaining difficult; they're not optimistic in terms of their economic expectations. They think inflation is going to continue to work lower. They have mixed views on short rates, where they still see the ECB raising rates but they're beginning to expect the U.S. to cut rates. But they see lower long-term rates both in Germany and in the U.S. as they expect central banks basically to do what's right and for inflation to continue to fall. In this environment, expectations are for stock markets to improve but only in the U.S. is there anything like a normal expectation for the stock market. Stock market expectations in the euro area and in Germany remain very weak.