ECB and Fed Uncertainty Leave the DAX on the Back Foot
Eurozone industrial production slid by 1.1% in July versus a 0.4% increase in June. Economists forecast a 0.7% decline. The latest report from the euro area provided more evidence of a euro area-wide recession.
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Market uncertainty toward the ECB monetary policy decision added to the gloomy sentiment. The chances of a 25-basis point ECB rate hike increased from 40% to 64% on Wednesday. Rising bets came despite the European Commission forecasting the German economy will contract by 0.4% in 2023.
CPI Report Cements September Fed Pause
The US CPI Report eased investor fears of further rate hikes to tame inflation. A softer US core annual inflation rate was enough for the markets, with the DAX recovering from heavier losses.
According to the CME FedWatch Tool, the probability of a Fed pause in September rose from 92% to 97% in response to the CPI Report. Significantly, investors were less divided over the November interest rate decision. The chance of a 25-basis point Fed rate hike fell from 41.1% to 38.9%.
The Wednesday Market Movers
Bayer was the worst performer, falling 4.63% in response to JPMorgan (JPM) placing the stock on a negative catalyst watch.
Bank stocks cushioned the downside, with Deutsche Bank and Commerzbank seeing gains of 2.85% and 1.12%, respectively.
However, Siemens Energy AG was also among the front runners, gaining 1.27%. News of the EU planning on rolling out measures to support the wind power industry drove buyer demand.
Auto stocks gave up early gains from news of the EU planning to investigate subsidies given to EV manufacturers in China. BMW and Volkswagen rose by 0.75% and 0.06%, respectively. However, Continental slid by 0.74%, with Porsche and Mercedes Benz Group seeing losses of 0.10% and 0.09%, respectively.
Today’s Session
The European Central Bank (ECB) will deliver its monetary policy decision. Economists predict the ECB will leave interest and deposit facility rates unchanged at 4.25% and 3.75%, respectively.
However, rising bets on an ECB rate hike will test buyer appetite. Rumors of an upward revision to inflation forecasts fueled bets on an ECB hike despite economic woes across the euro area.
An ECB hold on rates would shift the market focus to the ECB Press Conference. While investors would feel relief from a pause, a hawkish policy outlook and grim economic and inflation forecasts would pressure stocks.
The DAX Futures was up 29 points this morning.
US Jobs, Inflation, and Consumption in the Spotlight
US jobless claims, retail sales, and producer prices will be in focus today. A jump in retail sales and hotter-than-expected producer prices could test the Fed pause theory. An unexpected rise in bets on a Fed rate hike and a hawkish ECB would pressure stocks.
Economists forecast a 0.2% (July: +0.7%) increase in retail sales and a 0.4% (July: +0.3%) rise in producer prices in August. However, labor market conditions must remain tight to support hawkish bets. Economists forecast initial jobless claims to rise from 216k to 225k.
Short-Term Forecast
Downside risks linger, with the prospect of a euro area recession and hawkish ECB bearish for stocks. However, easing bets on further Fed rate hikes would cushion the blow. For the Thursday session, we expect the ECB outlook on inflation, the economy, and interest rates to be the key driver.
DAX Technical Indicators
Daily Chart
On Wednesday, the trend line rejected a DAX move toward the 50-day EMA and 16,007 resistance level for a second session. However, the DAX broke below the 15,663 support level (now the resistance level) on rising bets on an ECB rate hike.
A break above the 15,663 resistance level and a move toward the trend line hinges on the ECB policy decision and press conference. A dovish pause should offer market relief. However, a rate hike would bring the 15,459 support level and 200-day EMA into play. Buying pressure will build at 15,450, with the 200-day EMA confluent with the 15,459 support level.
The 14-Daily RSI reading of 41.69 signals the DAX can target the 15,459 support level before hitting oversold territory.
4-Hourly Chart
The DAX sits below the 50-day and 200-day EMAs, affirming bearish price signals. If the DAX breaks above the 15,663 resistance level, it could approach the trend line and 50-day EMA. However, the ECB would need to hit pause and deliver a neutral stance press conference to drive buyer demand.
Failure to break above the 15,663 resistance level would leave sub-15,500 and the 15,459 support level in play.
The 41.30 RSI reading indicates the DAX can fall to sub-15,500 before entering oversold territory.
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