Europe’s problems are more immediate. Encouraging news about Pfizer’s vaccine won’t change the European circumstances in near enough time to avoid what’s more and more looking like a real possibility for a retrenchment. In this case, COVID cases are a primary culprit, meaning how authorities over there are responding to their rise.
As such, it has taken the shine off some of the more stimulus-laden optimism that had been shining particularly in Germany. That country’s ZEW survey, for example, had absolutely surged throughout the summer even though it has been clear the Germany or European economy hadn’t followed nearly that close. Initial strong rebound, yes, but then a very clear stall.
The ZEW Sentiment Index shot up to just above 77 in September, the highest in twenty years. The economy of 2020, however, little resembles that of the late nineties and the year 2000. The difference, obviously, the ECB and the promises for much more on the (consolidated) fiscal side. Believing in, and counting on, the biggest government interventions ever at the very least risks whistling past the graveyard.
So much has been staked on them because they’re the only game in town. While the ZEW’s sentiment index was that high, survey respondents at the same times told the outfit that they weren’t seeing much if any improvement in the current situation. What they had really been saying – up to September – was that they had faith in QE and fiscal spending and that both combined would eventually work and work very well at some point still far off in the future.
If given enough time, great. Interruption apparently wasn’t factored. Nor was how a potential disruption might do even more damage with the upturn yet so small. To this point, there’s actually been so far very little improvement at all. Reopening rebound, yes, but then what?
The ZEW situation index remains deep underwater and barely much higher than its rather recent trough; and this view of Germany’s current state actually declined in November from October.
Now more COVID to be factored into how mostly governments and their various agencies (including central banks) will almost certainly have to respond again to these growing “headwinds.” Europe isn’t exactly starting off this building negative trend from the best situation; expectations for growth out in the distant future don’t do anyone any good right now.
No surprise, then, that sentiment has shifted violently over the past couple of months. The latest ZEW number for it dropped sharply in November after having done the same already in October. Combined, the index has crashed by 38 points; one of the largest two-month drops in the series history (it should be noted that this month’s data was collected before Pfizer’s announcement; it may be that the vaccine news reinvigorates sentimental optimism next month even if the situation doesn’t change – or gets worse again).
The last time ZEW sentiment had collapsed this quickly, outside of February-March 2020, it was the middle of 2012 when faith in Mario Draghi’s first “flood” of “stimulus” (LTRO’s) ran aground of Euro$ #2 pushing Europe even deeper into recession – the ZEW situation index never really changed all that much. This should sound eerily familiar, which may be what we’re seeing in these sentiment estimates.
Never wanting to sound alarmed, ECB officials sure sound alarmed. Christine Lagarde said late last month that Europe’s economy was “losing momentum more rapidly than expected.” No kidding. That’ll happen when your upturn is less of a turn up than you’d planned.
The rise in Covid-19 cases and the associated intensification of containment measures is weighing on activity, constituting a clear deterioration in the near-term outlook.
Thus, unlike the Treasury market (at least in terms of the nominal situation), the German bund market has been trading in exactly this way. But, more to the point, the view from bunds rather than the one apparent in Treasuries has been echoed in markets worldwide. Even this week’s vaccine announcement hasn’t really changed all that much, meaning this isn’t strictly a German issue.
And why would it be? Not only was a vaccine expected at some point, it will take a long time to ramp up sufficient production to make any tangible difference for the global economy. In the meantime, still, the only game in town is “stimulus” when it should be clear and unambiguous “recovery.” Case counts are a local issue; this is a global phenomenon.
The first economic “V” is gone, dead and buried under too little rebound. This second one, the “stimulus” one, well, what is the ECB (or Fed) really going to do that it hasn’t done already which didn’t keep the first “V” alive? The ZEW respondents seem to love the idea behind monetary policies but only at first.
Understandably, even the Germans are suddenly worrying.
For those outside of Germany and Europe, the bad news is that for a dozen years there’s been hope of “decoupling”; that somewhere, someone will be able to break free of whichever global downturn which (“unexpectedly”) materializes along the way and separate themselves enough to go in a different (recovery) way. Unfortunately, it hasn’t happened yet. Synchronized, just not all at once.
Even in nominal Treasuries where the shorts have been piled higher than the ZEW at its recent zenith, there’s not a whole lot of faith in reflationary decoupling – or even the prospects for the vaccine in the near and intermediate terms.
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