ZEW Expectations Continue to Sink

The ZEW index in June saw its current component backtrack for the first time in eight months while the expectations reading fell for the seventh month in a row. The current reading had improved for seven months in a row until this month.

The current index is stronger than its current level only about 11% of the time while the expectations value is higher about 51% of the time. That means that the current situation is still considered extremely good, but expectations are at a level of relative uncertainty. Since the economy generally grows over time, a reading that is at its historic middle is one that expects growth to continue. But expectations can no longer be called `upbeat'.

The ZEW financial experts cut their expectations for earnings on stock to 2.6 in July from 2.8 in June. This is its lowest reading in 19 months. The outlook for bonds remains negative, but after improving last month it back to deteriorating. Apart for last month, it was last higher in November.

This shift, to favor stocks less, reflects some degree of pessimism. It fits with the slide in expectations, slippage in the Ifo survey, dropping industrial production and weakening Markit PMI sector readings. The slippage in ZEW expectations tells us that these weaknesses in the German economy continue.

They are accompanied by a weakening across much of the euro area, especially in the factory sector. The German current reading has finally stopped moving up and drooped back this month. The signal from expectations remains remote. Expectations that sour do not always lead to worse conditions ahead. The German Ifo expectations index does not have a good forecasting record in that regard. Still, its weakening does not stand alone and the current index does reflect some of the actual weakness we have seen in topical German activity measures.

Clearly, Europe is a place where we want to keep our eyes open. The recent weakness in Germany has been accompanied weakness elsewhere. Other nations in the European Monetary Union do not have as much growth to work with as Germany and weakening in those places could become more of a problem. Remember that Germany's own expectations are in the midst of a six-month slide.