The DAX index has retracted in the Wednesday session, after sharp gains on Tuesday. The DAX is currently trading at 11,309, down 0.50%. On the release front, German Factory Orders declined 1.6%, compared to an estimate of a 0.3% gain. On Thursday, Germany releases industrial production and the EU publishes its economic forecasts.
Investors remain concerned about the strength of the eurozone economy, as the locomotive of the eurozone has been struggling. Retail sales ended the year on a low, as the December score plummeted 4.3% last week, its sharpest decline in more than 12 years. On the manufacturing front, German manufacturing PMI for January dipped to 49.7, below the 50-point level which separates contraction and expansion. This was the weakest score since October 2014. The dismal news continued on Wednesday, as factory orders fell 1.6%, after a decline of 1.0% in the previous release. Global trade tensions and weakness in the German auto sector continue to weigh on the manufacturing sector. Weakness in manufacturing can be seen across the eurozone, as France and Italy both posted manufacturing PMIs in contraction territory in January.
The eurozone may be experiencing a slowdown, but that hasn’t changed the ECB’s guidance on interest rates. The bank continues to forecast a rate hike in December, but this stance has become increasingly out of sync with market sentiment, which has ruled out a rate hike before mid-2020. With ECB President Mario Draghi due to leave the job in October, policymakers are reluctant to alter current guidance and ‘tie the hands’ of Draghi’s successor. This means that the ECB will cling to its guidance unless economic conditions significantly deteriorate.
