The DAX index has had an uneventful week, and is showing limited movement in the Friday session. Currently, the DAX is trading at 12,717.25. On the release front, German Preliminary GDP gained 0.6%, matching the forecast. German Final CPI came in at a flat 0.0%, also matching the estimate. Eurozone Industrial Production contracted 0.1%, marking its third decline in four months. The weak reading missed the estimate of +0.3%. It’s a busy day in the US, with CPI and Retail Sales reports for April.
German economy has posted solid numbers in recent months, and the forecast for Preliminary GDP was on the money, as the economy expanded 0.6% in the first quarter, compared to a 0.4 gain in Q4 of 2016. The upswing was broadly based in the economy, with strong consumer and state spending, and an upsurge in the construction and manufacturing sectors. Stronger global demand has boosted German exports, notably for automobiles and machinery. However, inflation continues to recede, as Final CPI dropped to 0.0%. This trend has also characterized inflation in the eurozone, which rose earlier in the year but has since retracted.
The eurozone economy received a passing grade on Thursday, as the European Commission released its Spring 2017 Economic Forecast. The report noted that the European economy is in its fifth year of recovery, and forecast eurozone GDP growth of 1.7% in 2017 and 1.8% in 2018. On the inflation front, the report stated that inflation had risen in recent months, but this was mainly due to an increase in oil prices. Still, inflation was expected to reach 1.6% in 2017 and 1.3% in 2018, compared to just 0.2% in 2016. Stronger growth has led to lower unemployment, and the report projected that eurozone unemployment rate would drop to 9.4% in 2017 and 8.9% in 2018. The report reiterated what ECB president Mario Draghi has long been saying, namely, that risks to the eurozone economy remain tilted to the downside. These risks include US economic and trade policy under President Trump, the banking sector in Europe and the UK’s exit from the EU. This forecast is considerably more optimistic than the Winter 2017 forecast, as is apparent from the captions in the press releases for these two reports: The Winter forecast was entitled “Navigating through choppy waters”, while the caption for the Spring forecast reads “Steady growth ahead”.
ECB President Mario Draghi addressed a Dutch parliamentary committee on Wednesday, and reiterated that the ECB continues to monitor growth and inflation levels, but has no plans at present to modify its monetary policy. Draghi said that that central bank would tighten its policy once the “tail risks” of a drop in inflation receded and growth improved. Currently, the ECB is making monthly purchases of EUR 60 billion under its asset-purchase scheme, which is scheduled to expire in December. Inflation levels were higher in the first quarter, which led to calls for Draghi to tighten policy. However, the ECB was reluctant to make any moves during the French election campaign, and this aversion could continue, with Germany holding elections in September. Bottom line? We can expect the ECB to hold course, unless eurozone growth and inflation levels climb sharply.
President Donald Trump’s firing of FBI director James Comey could have been viewed as yet another controversial move by the temperamental president , but the firing has set off a political firestorm in Washington. Trump has been accused of triggering a constitutional crisis and undermining the rule of law. Comey had been conducting an investigation into possible collusion between Trump and Russia during the presidential campaign, so predictably, Comey’s dismissal has raised suspicions that Trump is trying to impede the investigation by firing Comey. The crisis could heat up further, with calls in Congress to appoint an independent investigator into Trump’s connections with Russia. This latest political storm has yet to shake up the markets, but a prolonged crisis could paralyze Washington and delay Trump’s agenda of tax reform and increased fiscal spending.
