Getting a handle on the market reaction to the German Economic Sentiment Indicator by ZEW is notoriously complicated.
Often, the market will not react immediately following the data release. It tends to shift later in the day and analysts will attribute the move to the survey.
Because of the COVID situation, that issue has been exacerbated.
Here are some things to consider about potential market moves following the data.
The ZEW ESI Discrepancy
The key to the economic sentiment survey is to compare its two parts.
ZEW asks economists how they see the situation now, and how they expect things to be six months from now.
In the era of COVID, that six months is important. This is because it relates to the timing of expected vaccines and lockdown policies.
Usually, during periods of economic growth, the current situation is evaluated as “better” than the future situation,. This is simply because we have less certainty about the future.
However, in a recession, that inverts, and experts expect the economy to recover.
The degree of difference between the Economic Sentiment Indicator (ESI) and the Economic Situation (ES) shows how fast economists think the economy will recover.
Interpreting ZEW in COVID
If ESI is more positive than the ES, the sentiment is negative. That generally can be understood as economists thinking that the economy will recover faster than it’s currently shrinking.
So far, ESI has been wildly positive, but the ES component has been even more negative.
One of the theoretical ways to determine if the consensus in Germany is that a recovery is underway, is for the net sum between ESI and ES to turn positive.
The other factor to consider is the timing of vaccines.
The last survey conducted in August meant that six months later would be February 2021. By then, we expect at least one of the current vaccines to be widely available.
That would mean that even if there are a lot of cases in the winter, authorities likely wouldn’t reimpose lockdowns because people should be getting the vaccine.
Consequently, the ESI was significantly higher. And it ought to remain higher unless there is a major disruption in the vaccine development process.
What We Are Looking For
Generally, we’d look for the ZEW Economic Sentiment Indicator for the potential market reaction if there is a beat or miss of expectations.
But this time around, we might want to focus more on the difference between it and the Economic Sentiment indicator as explained above.
Projections are for the German ZEW Sept ESI to come in less optimistic at 67.1 compared to 71.5 in the prior month. This compares to the ZEW Sept ES showing marked improvement in sentiment to -60.2 compared to -81.3 prior.
If the expectations prove true, then ES will finally overtake ESI.