The European Central Bank is widely expected to lift interest rates by
25-basis point at its next policy meeting in early May, potentially
followed by a final 25-basis point hike in June, as inflation remains
uncomfortably high.
Even if further monetary policy tightening undermines the economic outlook
for the eurozone, the European Central Bank is not in a position to
consider a reversal from its current stance until both projected and actual
inflation are clearly moving towards its target of 2%.
Despite ongoing challenges such as the war in Ukraine and the associated
sanctions against Russia, the German government predicts that the peak in
underlying inflation has been reached. The annual inflation rate stood at
7.4% in March, severely eroding consumers’ purchasing power. The German
government said it expects inflation to slow to 5.9% this year, from 6.9%
in 2022, and dropping to 2.7% in 2024.
The government has slightly raised its economic growth forecast for 2023 to
0.4% from a previously projected 0.2% and expects the expansion to
accelerate to 1.6% next year. While gross domestic product would still be
relatively weak, the economy ministry was projecting a contraction of the
same magnitude last October.
Recent economic figures have given grounds for optimism, with factory
orders and exports increasing in February and a closely watched barometer
of business confidence consistently rising for the past seven months.
German first-quarter gross domestic product (GDP) figures are due on
Friday.
The German GfK Consumer Climate Indicator jumped to a 13-month high and
increased to -25.7 heading into May, which is the highest level since April
2022, and slightly above market forecasts of -27.9.
Despite strong Germany GfK Consumer Climate Indicator data released earlier
in the week, the DAX 40 index remains trapped in a tight range between
15,964 and 15,919 as the disappointing news from First Republic Bank
weighed on banking stocks, particularly in the U.S. but to a certain degree
in Europe as well.
German exports remain at a rather low level by long-term standards.
Sentiment among German exporters has rebounded in April to the highest
point seen since the start of the war in Ukraine in February 2022,
according to a survey by the Ifo economic institute.
Source: Tradingview
The German benchmark index traded sideways on Thursday, as investors
digested a slew of corporate earnings, with the banking sector in
particular focus. The quarterly reporting season in Europe is in full
swing, with the banking sector to the fore.
Deutsche Bank posted a better-than-expected 9% rise in first-quarter
profit, defying banking jitters, as income from higher interest rates has
offset a slump in revenues at the investment bank arm.
All these positive results in Germany this week have helped ease worries
about contagion after U.S. regional lender First Republic Bank shares
plunged, after the bank revealed $100 billion in customer withdrawals last
month, raising fears about its long-term viability.
The rally from the March low has stalled after hitting a 15-month high as
concerns about the health of the banking sector and global recession fears
reignited. While at this point there is no reversal signal evident on the
daily chart of the DAX 40 index, the proximity to its all-time high of
16,285 and the formation of a triple bearish divergence between the price
and the Relative Strength Indicator raises question about the
sustainability of the rally.
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