DAX to Face a Stern Test on US Labor Market Indicators and Powell

It was a bearish Tuesday session for the DAX, which fell by 0.60% to end the day at 15,560.

Economic data from the euro area delivered early support. However, investor jitters ahead of the heavily anticipated Fed Chair Powell testimony weighed before a Powell-fueled sell-off.

A choppy session saw the DAX rise to a session high of 15,706 before sliding to a late session low of 15,544. A late partial recovery limited the damage.

Economic Indicators Deliver Early DAX Support

The German economy was in the spotlight on Tuesday. Factory orders were in focus. Factory orders unexpectedly rose by 1.00% in January versus a forecasted 0.9% decline. In December, factory orders jumped by 3.4%.

According to Destatis,

• Foreign orders increased by 5.5%, while domestic orders slid by 5.3%.
• Orders from the euro area fell by 2.9%, while orders from the rest of the world surged by 11.2%.
• Orders in the capital goods sector increased by 8.9%, while orders in the intermediate goods sector fell by 8.9%. The consumer goods sector recorded a 5.5% decline in new orders.
• Beyond the aircraft and spaceship construction sector (+138.5%), manufacturers of motor vehicle engines saw a sharp increase in new orders (+6.8%).
• Excluding large-scale orders, factory orders were up 2.9%, while factory orders were down 10.9% year-over-year.

The better-than-expected numbers deviated from recent survey-based numbers. According to the February survey, new orders fell at the slowest pace in nine months but remained steep.

However, the upside was short-lived, as investor focus turned to Fed Chair Powell’s testimony on Capitol Hill.

Unexpectedly hawkish testimony caught investors by surprise. Powell sent the DAX and the US equity markets into negative territory.

On Tuesday, Fed Chair Powell spoke of the need for higher rates to combat inflation, noting that economic data was better than expected. In response to Powell’s testimony, the NASDAQ Composite Index fell by 1.25%, with the S&P 500 and the Dow seeing losses of 1.53% and 1.72%, respectively.

The Market Movers

It was a mixed day for the auto sector. Volkswagen saw more losses, falling by 0.63%, with BMW ending the day with a 0.45% loss. Continental and Daimler also saw red, ending the day down 0.38% and 0.57%, respectively. However, Porsche rose by 0.31%.

Bank stocks had a bearish session. Deutsche Bank and Commerzbank ended the day with losses of 1.55% and 1.05%, respectively.

The Day Ahead for the DAX

The German economy will be in the spotlight this morning. Industrial production and retail sales figures will be in focus. We expect both sets of numbers to draw plenty of attention. Following the better-than-expected factory order numbers on Monday, a sharp increase in production would support the ECB’s more optimistic economic outlook.

However, retail sales would also need to rebound. In the latest ECB Economic Bulletin, the ECB noted that rising wage growth and declining energy price inflation should ease the loss of purchasing power and support consumption. Upbeat retail sales figures would support the theory.

Later in the session, euro area GDP numbers from Q4 and ECB President Lagarde will be in focus. Barring a downward revision from prelim numbers, ECB Lagarde would likely draw more interest. However, Lagarde would need to talk of a hawkish policy move in April to spook investors.

After a busy morning session, the market focus will turn to the US economic calendar. ADP nonfarm employment change numbers for February and the JOLTs Job Openings report for January will be in the spotlight along with a second day of Fed Chair Powell testimony.

A jump in nonfarm payrolls, steady JOLTs job openings, and a hawkish Fed is a bearish combination.

Technical Indicators

The DAX has to move through the 15,603 pivot to target the First Major Resistance Level (R1) at 15,663 and the Tuesday high of 15,706. A return to 15,600 would signal a bullish session. However, the DAX would need the German and US stats to support a breakout session.

In the case of an extended rally, the bulls will likely test the Second Major Resistance Level (R2) at $15,765 and resistance at 15,800. The Third Major Resistance Level (R3) sits at 15,927.

Failure to move through the pivot would leave the First Major Support Level (S1) at 15,501 in play. However, barring a US data-fueled sell-off, the DAX should avoid sub-$15,400. The Second Major Support Level (S2) at 15,441 should limit the downside. The Third Major Support Level (S3) sits at 15,279.

Looking at the EMAs and the 4-hourly chart, the EMAs send bullish signals. The DAX sits above the 50-day EMA (15,430). The 50-day EMA moved away from the 100-day EMA, with the 100-day EMA widening from the 200-day EMA, delivering bullish signals.

A hold above the 50-day EMA (15,430) would support a breakout from R1 ($15,663) to give the bulls a run at R2 (15,765) and 15,800. However, a slide through the First Major Support Level (S1) at 15,501 would bring S2 (15,441) and the 50-day (15,430) into view. A fall through the 50-day EMA would signal a bullish trend reversal.

The Futures – DAX Sees Red

Looking at the futures markets, DAX was down 36 points, with the NASDAQ mini falling by 15.50. The Dow mini was up 6 points, however.

For a look at all of today’s economic events, check out our economic calendar.