DAX Index: Futures Flash Red After the Hawkish Fed

Highlights

• The DAX declined by 0.40% on Wednesday, ending the session at 16,904.
• On Thursday, investors will respond to the overnight FOMC Rate Statement and Press Conference.
• Corporate earnings, the German manufacturing PMI, and Eurozone inflation numbers also need consideration before the US session.

Overview of the DAX Performance on Wednesday

The DAX declined by 0.40% on Wednesday. Reversing a 0.18% gain from Tuesday, the DAX ended the session at 16,904.

German Retail Sales and Consumer Price Inflation

On Wednesday, German retail sales unexpectedly declined by 1.6% in December. Retail sales slid by 0.8% in November. The latest figures supported bets on a German Q1 2024 economic recession.

However, softer-than-expected German inflation numbers raised bets on an April ECB rate cut. The annual inflation rate softened from 3.7% to 2.9% in January.

US Economic Calendar: ADP Employment and Wage Growth

On Wednesday, weaker-than-expected labor market data failed to ease pre-Fed market jitters.

The ADP reported a 107k increase in employment for January. Significantly, the Employment Costs Index – Wages increased by 0.9% quarter-on-quarter in Q4. In Q3, the Employment Costs Index – Wages increased by 1.2% quarter-on-quarter.

Other stats included Chicago PMI numbers that were also disappointing. The Chicago PMI fell from 47.2 to 46.0 in January.

However, a more hawkish than expected Fed left the US equity markets with heavy losses. On Wednesday, the Nasdaq Composite Index slid by 2.23%. The Dow and the S&P 500 declined by 0.82% and 1.61%, respectively.

The Wednesday Market Movers

Auto stocks continued to climb following an upbeat outlook for 2024 from General Motors (GM).

Volkswagen rallied 2.74%, with BMW gaining 1.87%. Porsche and Mercedes Benz Group ended the day up 1.46% and 0.95%, respectively.

However, Bayer (-3.92%) continued to tumble following the US court ordering the firm to pay $2.25 billion to a Pennsylvania man.

Retail-linked stocks saw more losses. Online retailer Zalando SE and Adidas fell by 2.66% and 1.95%, respectively. An unexpected fall in German retail sales likely contributed to the losses. H&M sales numbers for December and January and news of the CEO leaving also impacted buyer appetite for retail-linked stocks.

Fed Chair Powell and China to Set the Tone for Thursday

On Thursday, manufacturing sector PMI numbers from China, stimulus chatter from Beijing, and Fed Chair Powell will set the tone.

Overnight on Wednesday, the Fed left interest rates at 5.50%. However, Fed Chair Powell said the Fed needs confidence that inflation would sustainably move towards 2% before cutting rates. Powell also warned the US economy could still experience a hard landing.

However, economic data from China and stimulus chatter from Beijing could cushion the downside. The Caixin Manufacturing PMI remained at 50.8. A pickup in overseas orders offset weaker domestic demand.

German Manufacturing and Eurozone Inflation in Focus

On Thursday, German manufacturing PMI and Eurozone inflation numbers will garner investor interest. According to the preliminary survey, the Manufacturing PMI increased from 43.3 to 45.4, signaling a Q1 recession.

However, Eurozone inflation numbers also need consideration. Economists forecast the annual inflation rate to soften from 2.9% to 2.8%. Softer-than-expected numbers could raise bets on an April ECB rate cut.

Beyond the numbers, ECB President Christine Lagarde and Chief Economist Philip Lane are on the calendar to speak. Reactions to the inflation numbers could move the dial.

Corporate earnings will set the DAX up for a busy session. Merck&Co, Deutsche Bank, Siemens Healthineers, BNP Paribas, Ferrari, and ING Groep are among the big names releasing earnings from Europe.

US Calendar: US Labor Market in Focus

On Thursday, the US labor market will be in focus. Unit labor costs, nonfarm productivity, and jobless claims warrant investor consideration. Robust labor market data could further reduce investor bets on a March Fed rate cut.

Economists forecast unit labor costs and nonfarm productivity to increase by 1.6% and 2.5% in Q4, respectively. Significantly, economists expect initial jobless claims to fall from 214k to 212k in the week ending January 27.

Beyond the numbers, investors must consider the US earnings calendar. Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Meta Platforms Inc. (META) are among the big names to release earnings on Thursday.

Short-term Forecast

Near-term trends for the DAX will likely hinge on inflation, US labor market data, central bank chatter, and earnings. However, softer-than-expected inflation and upbeat earnings could counter the hawkish Fed.

In the futures, the DAX was down 32 points, while the Nasdaq mini was up 76 points.

DAX Technical Indicators

Daily Chart

The DAX remained well above the 50-day and 200-day EMAs, affirming bullish price signals.

A DAX return to 17,000 would support a break above the December all-time high of 17,003.

On Thursday, euro area economic data, corporate earnings, central bank commentary, and the US economy calendar need consideration.

However, a drop below the 16,850 handle would give the bears a run at the 16,750 handle.

The 14-day RSI at 60.66 suggests a DAX return to the ATH of 17,003 before entering overbought territory.

4-Hourly Chart

The DAX held above the 50-day and 200-day EMAs, confirming the bullish price trends.

A DAX move to the Tuesday high of 17,000 would support a break above the December all-time high of 17,003.

However, a drop below the 16,850 handle would bring the 50-day EMA into play.

The 14-period 4-hour RSI at 56.47 indicates a DAX return to the ATH before entering overbought territory.