The German benchmark index enjoyed an impressive rally since late September advancing from a low of 11,860 to a high of 13,444 on Tuesday. This is its fifth consecutive week of gains and marks October as its best performing month since November 2020. After the Federal Reserve raised interest rates with another 75-basis-point on Wednesday the DAX 40 reversed its 5 weeks winning streak and has been trading deeply in the red on Thursday.
The European Central Bank (ECB) also raised interest rates by second jumbo 75-basis-point in late October bringing the official rate to 2%. The market reaction to the ECB meeting has been muted as the bank did not provide clarity on the future path of monetary policy and the DAX 40 has been moving in tandem with global markets.
The CPI for October surged to 10.7% – well above expectations, and five times above the central bank’s target of 2%. The ECB is likely to continue to raise interest rates to tame persistently rising inflation, despite the increasing probability of a eurozone recession. The focus is now on the final policy meeting of 2022, with the market expecting either a 50 or 75-basis-point hike. Despite lagging the Fed, this is the most aggressive monetary-tightening cycle in the ECB’s history.
Fears are mounting that the energy crisis driven by the war in Ukraine, will drag down output in the block, adding to the economic risks of rapidly rising interest rates, therefore a contraction in the coming months is probable. Despite the growing risks of a downturn in Europe, the central bank has little choice but to stick to its monetary tightening policy to supress growth; therefore, rate hikes are likely to continue into 2023, until inflation shows clear signs of a slowdown. Thus, the ECB faces the challenges of a record inflation and a likely economic downturn.
In the face of inflation and energy crisis, the ECB rate hikes will add pressure to the European economy and push it to the brink of recession. Despite Europe facing strong headwinds that are darkening its economic outlook, seasonally adjusted GDP for Q3 2022 increased by 0.2% in the eurozone, according to a preliminary flash estimate published by Eurostat, the statistical office of the EU.
