why after everything they know and have heard about the german even after german soilders show up do the jews of sighet continue to smile

They continue to smile because the Germans fool them into believing that everything will be alright. They treat them well, they keep them calm, and they're nice to everyone...... for a time.

"Even after the townspeople hear that the Fascists have come into power in Hungary, no one really worries until the Germans actually invade Hungary and arrive at Sighet itself. Even then, the Germans seem nice and friendly, at least until Passover, when the persecution of the Jews begins in full force."