The conclusion of the month of August marks a challenging period for
investors, characterized by heightened difficulties in the eurozone due to
an unexpectedly pronounced decline in business activity. Despite the
release of official data indicating a more substantial decrease in German
retail sales in July, investors exhibited indifference.
Over the past year, the European Central Bank (ECB) has executed a rapid
succession of rate hikes, achieving historically unprecedented levels in
more than two decades. However, the onset of stagnant growth coupled with
rapidly deteriorating sentiments among both businesses and households has
ignited a fervent discourse regarding the necessity and extent of further
policy tightening.
Investor attention remains intently focused on the ECB’s stance on interest
rates, mirroring the endeavour of the Federal Reserve, as both central
banks strive to curtail inflation through tighter financial conditions. In
late July, the ECB signalled its willingness to maintain rates at their
current level during the upcoming monetary policy meeting in mid-September.
Nevertheless, robust inflationary data could potentially propel the central
bank toward a more hawkish standpoint.
Contrary to expectations for a reduction to 5.1%, overall inflation within
the euro-sharing nations remained constant at 5.3% in August. This was
driven by a notable surge in energy costs during the month, as revealed by
Eurostat data on Thursday. Nonetheless, a fundamental gauge that excludes
the volatile components of food and energy exhibited the anticipated easing
from 5.5% in July to 5.3% this month, despite minimal movement in services
inflation.
Financial markets revised the likelihood of a September rate hike from
approximately 50% earlier in the week to 33%; however, expectations suggest
that another rate hike may still transpire within the year, possibly in
October or December.
Simultaneously, the rapidly deteriorating economic landscape will offer
advocates of a cautious approach within the ECB’s Governing Council
substantial rationale to advocate for a pause in tightening measures. This
intricate scenario implies that the ECB’s deliberations will remain
unsettled until the presentation of new economic projections by the staff
in the days leading up to the meeting scheduled for September 14.
Proponents of a cautious approach argue that the pace of growth has
substantially waned, and without significant stimuli for a resurgence, the
region’s economy, which has remained stagnant over the past three quarters,
could potentially slide into a recessionary phase.
In contrast the hawks see such a slowdown as desirable, particularly if it
were to cool down the very tight labour market, because price pressures
remain elevated and could lead to inflation becoming stuck at above the
ECB’s 2% desired target.
Source: TradingView
The rising inflationary and recessionary fears have put the DAX 40 index
into test. Sticky inflation is exerting pressure to the ECB to deliver more
rate hikes, while the deteriorating macroeconomic backdrop is testing the
theory of rate hikes tackling inflation. The rally in the benchmark German
index lost momentum in August and is likely to be capped for the year, as
stock prices are too high relative to earnings and recession fears mount.
The deteriorating Relative Strength Index indicator conditions suggest that
the rally is running out of steam and further consolidation between 15,460
and 16,500 is likely in the next few months.
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