DAX Index: Rising Inflation and Recessionary Fears Put DAX 30 to Test

Highlights

• The DAX fell by 0.24%, partially reversing a 0.88% gain, ending Wednesday at 15,892.
• German annual inflation softened from 6.2% to 6.1%, spooking investors and pressuring the ECB to consider more rate hikes.
• Eurozone inflation figures are key to cementing a potential September ECB rate hike, as forecasts show a slight softening.

DAX Ends Three-Day Winning Streak

The DAX fell by 0.24% on Wednesday. Partially reversing a 0.88% gain from Tuesday, the DAX ended the day at 15,892.

German Inflation Comes in Hotter to Spook Investors

German inflation figures spooked investors on Wednesday. The German annual inflation rate softened from 6.2% to 6.1%, with core inflation easing from 6.5% to 6.4%. Economists forecast inflation rates of 6.0% and 6.3%, respectively.

Sticky core inflation will leave the ECB under pressure to deliver more rate hikes to tame inflation. However, the deteriorating macroeconomic backdrop may test the theory of rate hikes to tackle inflation.

Business sentiment across the euro area deteriorated in August. The Business and Consumer Survey fell from 94.5 to 93.3 versus a forecast of 93.7. Alarmingly, consumer inflation expectations spiked in August, surging from 4.9 to 9.0.

US Economic Indicators Support a Fed Hold on Interest Rates

In stark contrast to the numbers from Europe, US ADP nonfarm employment figures gave the Fed more reason to hit the brakes. The ADP reported a 177k increase in nonfarm employment in August versus 371k in July. Economists forecast a 195k rise.

Considering the latest JOLTs job opening numbers and the slide in consumer confidence, the labor market is experiencing the effects of aggressive rate hikes to tame inflation. However, the latest numbers from the US were not enough to provide support. Investor angst over the German economic outlook remained a bugbear.

The US equity markets reacted favorably to the Wednesday numbers. On Wednesday, the NASDAQ gained 0.54%, with the Dow and S&P 500 rising by 0.11% and 0.38%, respectively.

The Wednesday Market Movers

Expectations of a September ECB rate hike and news of Orsted (ORSTED) expecting $2.3 billion in US impairments weighed on the utility sector.

RWE AG and Siemens Energy led the way down, sliding by 4.71% and 3.34%, respectively, with Siemens AG falling by 1.27%. However, autos and banks also struggled. Deutsche Bank and Continental AG led their respective sectors into negative territory, with losses of 0.78% and 0.87%, respectively.

Today’s Session

Economic indicators from China will set the tone this morning. NBS private sector PMIs for August sent mixed signals. While the NBS Manufacturing PMI increased from 49.3 to 49.7, the Non-Manufacturing PMI fell from 51.5 to 51.0.

The continued contraction across the manufacturing sector and slowing growth across the services sector paint a grim picture. Significantly, the PMI numbers signal the need for more action from Beijing.

Despite the gloomier numbers, the Asian equity markets made modest gains through the morning. Bets on the Fed hitting the brakes on interest rate hikes limited the impact of the PMI numbers.

The DAX Futures was up 12 points this morning. However, economic indicators from Germany, the Eurozone, and the US will likely deliver a choppy session. On the one hand, easing bets on further Fed rate hikes is bullish. On the other hand, euro area recessionary fears and hawkish ECB sentiment are bearish.

German retail sales and unemployment figures will move the dial this morning. The German GfK Consumer Climate Survey revealed consumer jitters over unemployment and income expectations. An increase in the German unemployment rate would fuel recessionary jitters. A pullback in consumer spending would adversely affect the German economy further.

Economists forecast retail sales to rise by 0.3% in July and the unemployment rate to remain at 5.6%.

However, Eurozone inflation figures also need consideration. After the German inflation numbers, sticky inflation could cement a September ECB rate hike.

Economists forecast the Eurozone inflation rate to soften from 5.3% to 5.1% and core inflation to ease from 5.5% to 5.3%.

With inflation fueling hawkish ECB bets, the ECB monetary policy meeting minutes need digesting. A divided camp on further rate hikes should provide modest DAX comfort.

US Inflation, Income, Spending, and Labor Market Numbers in Focus

The US Personal Income and Outlays Report will garner interest this afternoon. As investors price out a September Fed rate hike, the numbers could refuel Fed rate hike bets. Significantly, investors would also raise the chances of a Fed-fueled hard landing.

Forecasts favor a more hawkish Fed outlook. Economists forecast the Core PCE Price Index to increase 4.2% year-over-year in July versus 4.1% in June. Personal spending and income figures support a pickup in spending. Economists expect personal income to increase by 0.3% (June: +0.3%) and spending by 0.6% (June: 0.5%).

However, US jobless claims need to avoid a spike. Steady jobless claims would leave the Personal Income and Outlays Report to influence Fed policy goals.

Short-Term Forecast: Precarious Moment for the DAX

Considering the latest euro area and US economic indicators, Germany appears to be heading into a recession. Market conditions could deteriorate further as inflation numbers raise the chances of a September ECB rate hike. Cracks in the US labor market are also forming. While investors ease bets on a Fed rate hike, the tables can turn quickly.

DAX Technical Indicators

Daily Chart

The 16,000 – 16,080 resistance band capped the upside on Wednesday. Sticky German inflation numbers led to a fall through the 50-day EMA, a bearish price signal. Today, economic indicators from China and inflation jitters will likely test buyer appetite.

However, rising German retail sales, steady unemployment, and softer Eurozone inflation numbers would deliver support. A DAX move through the lower level of the 16,000 – 16,080 resistance band would bring 16,100 into view.

Considering the 14-Daily RSI at 51.55, the DAX has room to run before hitting overbought territory. However, US economic indicators would need to support a Fed pause but avoid reigniting recessionary jitters.

4-Hourly Chart

The DAX sits below the 16,000 – 16,080 resistance band. Hawkish ECB rate hike bets weighed while easing expectations of a Fed rate hike limited the damage.

Softer-than-expected Euro area inflation numbers and rising bets on a Fed pause would be bullish. Favorable numbers would give the bulls a run at the 16,000 – 16,080 resistance band.

However, hotter-than-expected economic indicators from the euro area and the US would fuel a flight to safety. A fall through the 50-day EMA would support a fall to sub-15,750.

For a look at the economic events, check out our economic calendar.