Flash euro zone inflation for March surprised with a larger-than-expected
1.6% drop during the month falling to 6.9%, down from 8.5% the prior month.
This is the fifth consecutive monthly decline, however; the reading remains
well above the European Central Bank’s target of 2%.
Core inflation, which excludes the volatile food and energy items, ticked
up and hit a new record high of 5.7% for the bloc in March, putting
enormous pressure on European Central Bank officials to continue on with
further interest rate hikes.
Last month the ECB raised its main interest rate to 3% but did not offer
guidance for its next meeting on the 4th of May, citing that the
recent financial turmoil requires caution. Since then, however; several
policymakers have signalled that more tightening might be necessary. While
the decision of the ECB would be data-depended, markets have fully priced
in a 25-basis point rate hike in May and another 25-basis point increase in
June.
German equities posted healthy gains over the past six months, and
investors have remained pretty buoyant despite the latest banking turmoil
and the surprise production cut on Sunday by OPEC+ which triggered a sharp
spike in oil prices at the beginning of the week.
Higher oil prices could filter through the global economy and have a
significant inflationary impact. This is certainly a worry for central
banks which have been trying to fight sky high inflation over the past
year.
Earlier this week data showed that manufacturing activity in the euro zone
remained in contraction territory, raising fears of an economic slowdown in
the bloc. However, German exports posted their biggest monthly rise since
June in February, boosting hopes the country may avoid recession in the
first quarter of 2023.
The S&P Global Germany Services PMI was revised slightly lower to 53.7
in March of 2023 from a preliminary estimate of 53.9 but continued to point
to the strongest growth in the services sector since May last year.
Data released on Thursday showed that Industrial production in Germany
surged 2.0% month-on-month in February, beating market forecasts of 0.1%.
The DAX 40 traded higher on the news but risk sentiment remains fragile as
the economy is slowing down.
The banking crisis has not dented demand for stocks and the Frankfurt
benchmark index managed to reclaim its pre-banking turmoil highs. Hopes
that the ECB may be approaching the end of its aggressive interest rate
hiking cycle is supporting the equity market.
The DAX 40 index is holding up its last week’s gains, despite concerns
about the spike in oil prices and the slowing manufacturing activity data.
However, given the proximity to the multiple resistance around 15,700
combined with worries that the economy is cooling, further gains from here
may be limited.
While at this point there is no reversal signal evident on the daily chart,
we note the formation of a bearish divergence between the price and the
Relative Index Indicator, which suggests that the rally from the September
2022 low might be approaching a turning point.
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