DAX Futures Flash Green as Bulls Brush Aside China Deflation

It was a bearish Wednesday session for the DAX, which fell by 0.38% to end the day at 15,896.

Softer US inflation figures failed to support a breakout session. Sticky inflation eased bets on a Fed interest rate cut in 2023, reversing early gains. Inflation numbers from Germany were also bearish, with the April figures supporting a more hawkish ECB monetary policy outlook.

On Wednesday, the NASDAQ Composite Index and S&P 500 saw gains of 1.04% and 0.45%, respectively, while the Dow fell by 0.09%.

German and US Economic Indicators Weigh

It was a busy Wednesday session, with inflation figures from Germany and the US drawing interest.

According to the finalized German CPI report, Germany’s annual inflation rate softened from 7.4% to 7.2% in April, unchanged from the prelim figure. Significantly, the harmonized index of consumer prices (HICP) rose by 7.6% year-over-year versus 7.8% in March.

According to Destatis,

• Energy prices accelerated in April, rising by 6.8% year-over-year after increasing by 3.5% in March.
• Household energy prices (total) were up 21.1% compared with April 2022. Natural gas prices (+33.8%) and prices for firewood, wood pellets, and other solid fuels (+29.8%) reignited energy price pressures.
• Food price inflation slowed from 22.3% to 17.2% in April but remained elevated.
• Excluding energy and food, the inflation rate stood at 5.8%, reflecting the impact of food and energy prices on headline inflation and consumers.

Softer US inflation figures from Wednesday failed to provide support. While the US CPI Report eased bets on a June Fed interest rate hike, sticky inflation also contained bets on a near-term Fed interest rate cut.

In April, the US core annual inflation rate softened from 5.6% to 5.5%, with headline inflation easing from 5.0% to 4.9%. Economists forecast the headline inflation rate to hold steady at 5.0%.

According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike fell from 21.2% to 5.0% in response to the CPI Report. However, the chances of a June rate cut remained at 0%.

The Market Movers

It was a bullish day for the auto sector. Continental surged by 3.06%, with Mercedes-Benz Group rising by 0.76%. Volkswagen and Porsche saw gains of 0.22% and 0.16%, respectively. BMW ended the session flat.

It was a bullish session for the banks. Commerzbank and Deutsche Bank ended the day up 0.39% and 0.47%, respectively.

The Day Ahead for the DAX

It is a quiet day ahead on the European economic calendar. There are no euro area economic indicators for investors to consider today. The lack of economic indicators will leave central bank chatter and inflation numbers from China ahead of the US session.

China’s annual inflation rate softened from 0.7% to 0.1% in April versus a forecasted 0.4%. Consumer prices fell by 0.1% in April, following a 0.3% decline in March. Significantly, the producer price index was down 3.6% year-over-year in April versus 2.5% in March. Economists forecast a 3.2% decline.

The wholesale inflation figures signaled further weakness in demand, weighing on riskier assets earlier in the day.

With inflation in the spotlight, investors should monitor ECB member commentary considering sensitivity to inflation. ECB President Christine Lagarde will attend the G7 Finance Ministers and Central Bank Governors Meeting. ECB Executive Board members Isabel Schnabel and Luis de Guindos are also on the calendar to speak today.

On Tuesday, Isabel Schnabel remained hawkish, warning the markets of more rate hikes until core inflation softens. Schnabel had this to say,

“Based on today’s data, there is no doubt that we have to do more to bring inflation back to our 2% target in a timely manner. We will raise rates decisively until it becomes clear that core inflation is also declining on a sustained basis.”

Looking ahead to the US session, it is a busy day on the US economic calendar. US initial jobless claims and wholesale inflation numbers will be in focus.

Following the US CPI Report, softer wholesale inflation numbers and rising jobless claims would further ease the pressure off the Fed and support riskier assets.

Economists forecast initial jobless claims to increase from 242k to 245k and for the producer price index to increase 2.4% year-over-year in April versus 2.7% in March.

With inflation and the labor market in focus, we expect FOMC member commentary to also influence. FOMC member Christopher Waller is on the calendar to speak later today.

Beyond the economic calendar, the banking sector, the US debt ceiling, and corporate earnings also need consideration.

DAX Technical Indicators

Resistance & Support Levels

The DAX has to move through the 15,910 pivot to target the First Major Resistance Level (R1) at 15,971 and the Wednesday high of 15,985. A return to 15,950 would send a bullish signal. However, the DAX would need central bank chatter and US economic indicators to support a breakout.

In the case of an extended rally, the bulls will likely test resistance at 16,000 but fall short of the Second Major Resistance Level (R2) at 16,046. The Third Major Resistance Level (R3) sits at 16,182.

Failure to move through the pivot would leave the First Major Support Level (S1) at 15,835 in play. However, barring a risk-off-fueled sell-off, the DAX should avoid sub-15,750. The Second Major Support Level (S2) at 15,774 should limit the downside. The Third Major Support Level (S3) sits at 15,638.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The DAX sits above the 50-day EMA (15,813). The 50-day EMA pulled further away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above S1 (15,835) and the 50-day EMA (15,813) would support a breakout from R1 (15,971) to give the bulls a run at R2 (16,046). However, a fall through S1 (15,835) and the 50-day EMA (15,813) would bring S2 (15,774) into view. A fall through the 50-day EMA would signal a near-term bullish trend reversal.

The DAX Futures Sees Green

Looking at the futures markets, DAX was up 34 points, with the NASDAQ mini up by 22.50. The Dow gained 29.

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