ZEW Components Weak Expectations Are a Disaster

The Zew index took a real turn for the worse. Expectations are on an all time low. German denial is coming rapidly to a close. Belief in the de-linked business cycle is going the way of belief in the tooth fairy. It’s something you just have to grow out of even if you once believed in it. The current conditions index is still relative high valued standing in the 61st percentile of its range. But it fell very sharply in July to an index reading of 17.1 from 37.6 the month before. German optimists are becoming a rarer breed.

German expectations for various stock sectors is at its lowest reading since the full series began in April of 1999. Sector expectations rank at 122 out of 122 months of history. Profit expectations are abysmal.

But the German story is still more complicated. Ordinarily a drop like this would bring expectations that the ECB would not continue hiking rates or might even foster expectations of cutting them and undermine the euro exchange rate. But this time the euro has popped up to anew high Vs the dollar showing that US troubles have for the moment trumped concerns that Germans might have about their own economy and the EMU economy at large. I think this will pass. One thing that is clear is that energy and financial problems are dragging down the growth rates in the European economies but that at the current level, the euro is just too high. I cannot see the euro moving significantly higher from here.