The Zew Survey Shows big German Improvement...Do We Believe It?

The Zew expectations reading has made a sharp turn higher from a reading of -53.8 in December tone of -21.6 in January. This the largest one month jump in the expectations reading in the history of the series back to 1992. The current reading improved also, rising by a more normal 1.6 points and still marking the 49th largest monthly increase, a borderline top 20% rise. The current index is still relatively solid as it is stronger than its current level only about 79% of the time. But the expectations index even with its sizeable leap is stronger than its January reading about 85% of the time. Expectations are still very weak, only weaker that this 15% of the time.

The level of expectations is lower than it was in July of last year but above there it stood in August. The current index has not made much headway: it is higher than it was in December but still below November’s level.

Both the current index and expectations index see improvement in January, but the expectations index has made a huge jump. We see the same configuration with Zew’s survey for the Eurozone itself.

Since the Zew survey is based on the responses of German financial experts it is a bit hard to say what is going on here. Economic data have not suddenly turned stronger neither have any sector reports or other surveys. Financial conditions in the e-Zone continued to be touch and go. These are not survey responses from people from sector industries who are seeing things at the grass-roots levels that are not recorded in the official data yet. During the period since the last Zew survey, Europe has been struggling and under the threat of further downgrades. Late last week S&P doled out significant downgrades to Eurozone sovereign borrowers. But these had not happened at the time of the Zew survey; still, they were pending at the time of the financial experts’ shift to optimism.

Note that this is the German side of the story or of expectations. And in the end S&P did not downgrade Germany but did downgrade a host of other EMU members.

The monthly MFG ad Services PMI indices did show some increase in their readings at year end but they continued to point to economic contraction. Other indicators of real activity like orders and industrial output have continued to decline.

Germany itself does not seem to have anything in train to account for such a shift in expectations. The lower Euro should help make German exports stronger and the euro was falling during this period but with global growth weakening by so much, one would not think that the increases in competitiveness would be such an important factor for the outlook where activity shifts tend to dominate.

Interestingly the stock market profitability expectations did not change that much from last month despite the jump in expectations. The index rose of stock profitability rose to a +3.9 from +2.3 and made its strongest showing Since October. Bonds improved to a -6.6 from -7.3 but are still weaker than their October ratings.

What we can infer is that there is some considerable optimism in Germany among financial specialists. We will look for the IFO report, an industry survey, to see if those with the feet on the ground and skin in the game see any sort of comparable improvement.