European indices update – EA Disinflation sets the scene for next week’s ECB meeting.
In last week's update, we noted that the European economy's expansion had slowed after a patch of soft data in May.
The run of soft data across industrial production, purchasing managers index's (PMIs) and the German Ifo survey was made more acute by a slowdown in Chinese economic data. China is the Euro Areas' (EA) largest trading partner.
Adding a new dimension to the slowdown, the release of softer-than-expected EA inflation for May last Thursday evening. Headline inflation fell to 6.1% Year-on-Year (YoY) from 7%, driven by a decline in energy, food, alcohol, and tobacco prices. Core inflation which excludes energy, food, alcohol, and tobacco, fell to 5.3% YoY from 5.6%.
Heading into next week's European Central Bank (ECB) meeting, the interest rate market is priced for two more 25 basis point (bp) rate hikes in June and July, taking the deposit rate to 3.75%. The ECB is expected to start cutting rates in early 2024 in response to slower growth.
In the UK, while growth has been stronger than expected, so too has inflation. The UK rates market is pricing four more 25bp rate hikes from the Bank of England (BoE) for a terminal rate of 5.50% by year-end.
The contrast between ECB closing in on its terminal rate and the BoE still with much work to do helps explain why the DAX is back near all-time highs, and the Financial Times Stock Exchange (FTSE) is still 5% below its all-time highs.
DAX Technical Analysis
After a brief look below the 15,700-support level (coming from the highs in February and March and uptrend support from the October 11,829 low), the DAX rebounded at the end of last week as US Congress passed the Debt Ceiling Agreement. The rally was also supported by expectations of imminent stimulus in China and strong US non farm payrolls print.
The pullback from the mid-May 16,375 high to last-week's 15,649 low appears corrective. As such, providing the DAX holds above the 15,649 low, we look for a retest and break of short-term resistance at 16,150 with scope to the 16,375 high.
Aware that should the DAX see a sustained break of support at 15,650ish, a deeper decline is expected towards year-to-date (YTD) lows and the 200-day moving average (MA) of 14,600/500 area.
FTSE Technical Analysis
The release of stubbornly high inflation data in mid-May and expectations of another 100 bp of BoE rate hikes has weighed on the FTSE. As has a lack of tech stocks.
After briefly looking below the 200-day MA at 7527 last week, the FTSE held and bounced from uptrend support near 7450 (coming from the October 6707 low). While the FTSE remains above support at 7450, a rebound towards resistance at 7800 is likely.
Aware that should the FTSE see a sustained break of uptrend support at 7450, a deeper decline is expected towards support at 7300/7200, coming from year-to-date lows is likely.
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