ZEW Current Conditions Deteriorate in Europe; Improve in the U.S.

ZEW current economic conditions deteriorate in Europe and improve in the United States in November. Expectations drop for Germany but rise in the U.S.

Remarkable shifts- The U.S. shows two remarkable shifts as U.S. inflation expectations moved from -36.7 in October to +2.7 in November, the second sharpest change in the history of the U.S. series exceeded only by the shift that occurred post-covid in March 2022. U.S. macroeconomic expectations also shifted sharply to +13.3 in November from -8.2 in October. That shift is the 14th largest in the history of that series. Both of these series have a history of nearly 33 years.

Survey BEFORE the U.S. elections finds firmness- The strength of the U.S. shift is impressive; it comes for a survey conducted BEFORE the U.S. presidential elections but after the Fed began its easing campaign. U.S. inflation expectations are still low at the November reading, which has a 23-percentile ranking. But now macroeconomic expectations have risen above their median (above a ranking of 50%) for a standing in their 61.4 percentile. U.S. current conditions have improved slightly in the month as well, rising to a net positive reading of 27.2 with a month-to-month rise of about 3 points to a standing at its 45.2 percentile, a bit short of its historic median at a diffusion value of 29.3.

Normalcy ahead for U.S./not so for Europe- The U.S. survey is climbing back into the normal zone whereas Europe and Germany are weak and getting weaker. In the case of Germany, the economic situation erodes to -91.4 in November from -86.9 in October, falling to a 4.1 percentile standing. That bad combination represents a significant month-to-month drop to an extremely weak level. The U.S. and Europe are in very different circumstances and apparently in different phases of their business cycles as well. Despite the ECB cutting rates, Germany is sinking, and Europe’s politics also are frayed. German expectations are still deteriorating in November and demonstrate half the ranking for U.S. expectations. Inflation expectations in Germany and in the euro area improved somewhat in November.

The reconnect-disconnect- However, there is an odd reconnect that looks more like a disconnect given the European-U.S. differences in the macro scene and for macro-expectations as U.S. and European short-term interest rate expectations are in lockstep with very weak readings with very low standing. In each case, they are showing only slight gains in November. Long-term rates also are oddly in a similar lockstep with both long rate series showing sharp upward pressure from October to November and with each maintaining very low historic standings. But the change in expectations for long-term rate expectations is the largest on record for the U.S. and the third largest on record for Germany, a testament to the connectedness of global capital markets where market rates appear to have stronger connections to each other across currencies than they are grounded in the fundamentals of domestic economic conditions.

Stocks make sense- Stock markets, however, do follow their domestic conditions and are weakened and weakening in Europe and Germany while the stock market is strong and strengthening in the U.S. These characterizations hold for diffusion values, monthly changes as well as for the levels of the diffusion values ranked historically.

Summing up It is interesting how ‘confused’ fixed income market seem to be about domestic economic conditions and how they are impenetrable in terms of using them to understand where domestic conditions are and are expected to go while the stock market are dead-on consistent. This is just an observation of mine, and I am still puzzling over what it means because I find it very confusing and hard to rationalize. The ZEW experts are quite economically and financially literate and I am still really trying to digest what these survey results mean. It is peculiar that business cycles and economic performance that are so dissimilar are associated with interest rate expectations so closely aligned internationally.