DAX Set for a Bullish Open on Debt Ceiling Vote and Fed Bets

It was a bullish Thursday session for the DAX. The DAX rose by 1.21%. Partially reversing a 1.54% fall from Wednesday, the DAX ended the day at 15,854. Significantly, the DAX fell short of the 16,000 handle for the second consecutive session.

Economic indicators from China set the tone of the Thursday session. China’s all-important Caixin Manufacturing PMI for May gave investors a better view of the macroeconomic environment midway through the second quarter. The Caixin Manufacturing PMI increased from 49.5 to 50.9 in May versus a forecasted 50.3, providing market relief.

Progress of the US debt ceiling deal and Fed bets also contributed to the upside, while hawkish ECB monetary policy bets capped the gains.

US Economic Indicators Fuel Bets on a Fed Pause

It was a busy European session, with euro area manufacturing PMI and Eurozone inflation numbers in focus.

Manufacturing sector PMI numbers reflected the continued decoupling with the services sector. The Eurozone manufacturing PMI fell from 45.8 to 44.8 in May. Spain, Italy, and Germany contributed to the more marked contraction across the manufacturing sector.

However, euro area inflation figures should ease pressure on the ECB to push interest rates higher to tame inflation. The annual inflation rate softened from 7.0% to 6.1%, with core inflation weakening from 5.6% to 5.3%.

With the ECB focused on core inflation, the hawks will likely consider the latest prelim numbers as sticky, delivering a degree of uncertainty on what to expect from the ECB over the nearer term.

However, US economic indicators fueled bets of a Fed pause in June, supporting the appetite for riskier assets.

ADP and jobless claims figures continued to signal tight labor market conditions. However, unit labor costs and sub-components of the ISM Manufacturing PMI fueled bets on a Fed pause in June.

According to the ADP, Nonfarm employment increased 278k in May versus a forecasted 170k rise. In April, nonfarm employment rose by 291k. Initial jobless claims also continued to signal tight labor market conditions.

However, unit labor costs fell short of forecasts, rising by 4.2% in Q1 versus 3.2% in Q4. Economists forecast a 6.3% increase. The US ISM Manufacturing PMI survey also supported a Fed pause. In May, the PMI fell from 47.1 to 46.9, with the ISM Manufacturing Prices Index tumbling from 53.2 to 44.2.

According to the CME FedWatch Tool, the chances of a 25-basis point interest rate hike fell from 26.4% to 20.4% on Thursday as investors responded to US inflation and labor cost numbers.

The DAX Market Movers

It was a bullish day for the auto sector. Continental and BMW rose by 1.61% and 1.55%, respectively, with Volkswagen up 1.29%. Mercedes-Benz Group and Porsche trailed, with more modest gains of 1.13% and 0.62%, respectively.

It was also a bullish session for the banks. Commerzbank and Deutsche Bank ended the day up 2.85% and 1.08%, respectively.

The Day Ahead for the DAX

It is a quiet day on the European economic calendar.

French industrial production and Spanish unemployment numbers will be out later this morning. However, barring an unexpected surge in unemployment, the French industrial production figures should garner more interest.

With the economic calendar on the light side, market risk sentiment will also provide direction ahead of the US session. We expect investors to continue focusing on US debt ceiling-related news and central bank commentary.

While there are no ECB members on the calendar to speak today, investors should monitor chatter with the media in response to the prelim inflation numbers for May.

Looking ahead to the US session, the US Job Report will be in the spotlight. While the markets are betting on the Fed to hit pause in June, a more marked pickup in wage growth and a solid increase in nonfarm payrolls could test the theory.

However, FOMC members and US debt ceiling-related news will also need consideration during the US session.

DAX Technical Indicators

Resistance & Support Levels

The DAX has to avoid the 15,817 pivot to target the First Major Resistance Level (R1) at 15,900. A move through the Thursday high of 15,863 would send a bullish signal. However, the DAX would need economic indicators and debt ceiling news to support a breakout.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at 15,945 and resistance at 16,000. The Third Major Resistance Level (R3) sits at 16,073.

A fall through the pivot would bring the First Major Support Level (S1) at 15,772 into play. However, barring another risk-off-fueled sell-off, the DAX should avoid the Second Major Support Level (S2) at 15,689. The Third Major Support Level (S3) sits at 15,561.

Looking at the EMAs and the 4-hourly chart, the EMAs sent bearish signals. The DAX sat above the 100-day EMA (15,852). The 50-day EMA closed in on the 100-day EMA, with the 100-day EMA narrowing to the 200-day EMA, delivering bearish signals.

A move through the 100-day EMA (15,852) and R1 (15,900) would give the bulls a run at the 50-day EMA (15,920) and R2 (15,945). However, a fall through S1 (15,772) would bring S2 (15,689) and the 200-day EMA (15,638) into view. A move through the 50-day EMA would send a bullish signal.

The DAX Futures Sees Green

Looking at the futures markets, DAX was up 70 points, with the NASDAQ and Dow up 35 and 56 points, respectively.

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