The DAX index has posted gains for a second straight day. In Wednesday’s European session, DAX is trading at 12,308.00, up 0.36% on the day. On the release front, there are no events out of the eurozone. In the US, the Federal Reserve releases its rate statement and is expected to maintain the benchmark at 1.25%. On Thursday, Germany releases GfK Consumer Climate, which is expected to remain unchanged at 10.6 points.
German indicators continue to point higher, underscoring a strong German economy. On Tuesday, German Ifo Business Climate climbed higher, as the indicator strengthened for a sixth straight month. The indicator hit another record high of 116.0, surprising the markets which had forecast a small drop from the previous reading. Clements Fuest, president of the Ifo Institute, continues to use superlatives to describe the German economy, calling sentiment in the business sector “euphoric”. Fuest added that optimism in the business sector is at its highest since Germany’s reunification. The robust economy has been the locomotive behind a reinvigorated eurozone economy, with stronger growth and lower unemployment. The marked improvement in economic conditions in the eurozone has sent the euro soaring, as the currency is up 9.8% since March 1. Although, the strong euro has not put a dent in business sentiment, this has not been the case with German stock markets. The high exchange rate has weighed on exporters’ shares, such as European automakers, and the DAX has declined 2.7% since June 1.
The Federal Reserve concludes its monthly policy meeting on Wednesday, and is not expected to alter its interest rate policy. However, traders should not assume this will be a non-event. The rate statement will be under careful scrutiny, as analysts will be looking for any references to the “I” word. Inflation continues to hover around 1.4% (based on the Fed’s calculations), well below the Fed target of 2%. In June, Janet Yellen described low inflation as “transitory”, but recent comments from Yellen and other policymakers have shifted in tone, an apparent acknowledgment that inflation may remain stuck at low levels. This has raised doubts as to whether the Fed will indeed raise rates one more time this year. No move is expected before December, and the odds of a December hike have fallen to just 37%, according to the CME Group. If today’s rate statement fails to reassure the markets that a December hike is planned, investors could respond by selling dollar-denominated assets in favor of other currencies or gold.
Aside from interest rates, Fed members will be discussing when to commence tapering the Fed’s $4.2 trillion bond portfolio. The bloated balance sheet is a result of the aggressive quantitative easing program which was put in place after the financial crisis in 2008. In June, the Fed outlined plans to taper purchases, with experts circling September as the start date of the reduction. This would involve the Fed tapering the purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Analysts expect the taper to begin in September, so we could see the Fed make reference to this in the July statement.
