The DAX index has started the trading week with gains. The index is closed on Monday, as German stock exchanges are closed for a holiday. The DAX closed on Friday at 12,822.84 points. On the release front, Eurozone and German Services PMIs continue to point to expansion. German Services PMI was unchanged in May, with a reading of 55.4, just above the forecast of 55.2 points. Eurozone Services PMI inched lower to 56.3, edging above the forecast of 56.2 points. On Tuesday, the Eurozone releases Sentix Investor Confidence and Retail Sales.
The DAX drifted for most of last week, but showed some life in the Friday session, posting strong gains of 1.25%. German stock markets took advantage of a weaker US dollar, which lost ground to the euro after soft US employment numbers on Friday. The markets were genuinely surprised at the Nonfarm Payrolls report. The economy produced just 131 thousand jobs, well short of the forecast of 181 thousand. Wage growth remains weak, and edged down from 0.3% to 0.2%. The unemployment rate dropped to 4.3%, but this reading can be largely explained by a decline in the participation rate. The disappointing employment reports are unlikely to alter the Fed’s plan to raise rates next week, but policymakers will remain very cautious about additional rate hikes in the second half of the year.
Stock markets on both sides of the pond are keeping a close eye on the Federal Reserve, which holds its policy meeting on June 14. The odds of a rate hike have climbed to 96%, according to the CME Group, up from 88% just a week ago. Last week’s dismal Nonfarm Payroll report has failed to put a dent in market confidence in a June rate hike. Traders should note that ahead of the March hike, the odds of a rate hike were also close to 100%, and the dollar actually lost ground after the Fed followed through with a quarter-point increase. Although an increase in interest rates would mark a vote of confidence in the US economy, the Fed continues to have concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets are skeptical, with the odds of a September rate hike at just 26%.
