Fundamental Analysis

DAX Ticks Lower As Eurozone Inflation Edges Lower


The DAX index has started the week with slight losses. In Monday's European session, the DAX is trading at 12,611.50, down 0.18%. On the release front, Eurozone Final CPI edged down to 1.3%, matching the forecast. On Tuesday, Germany and the eurozone release ZEW Economic Sentiment.

One of the key stocks on the DAX, Deutsche Bank, is under pressure, and dropped 0.91% on Friday. Germany's largest bank started off the Monday session with losses as well, after the ECB said it was considering implementing ownership-control procedures against the bank's two largest shareholders, Qatar's royal family and HNA, a Chinese conglomerate. The aim of the review is to ensure that an investor is financially stable and untainted by money-laundering or other crimes. If either shareholder fails the test, Deutsche Bank shares would likely fall.

Eurozone inflation levels have been softening in the second quarter. Eurozone Final CPI edged down from 1.4% to 1.3% in June, marking its weakest gain in 2017. Germany may be the catalyst of the eurozone's economic recovery, but the bloc's largest economy has not been immune to low inflation. Final CPI improved to 0.2% in June, compared to -0.2% in May. The ECB has set an inflation target of 2%, but German and eurozone inflation numbers remain well below that threshold. The ECB has acknowledged that economic conditions have improved, but insists that it has no plans to taper its ultra-loose monetary policy unless inflation levels move higher. The current asset-purchase plan is scheduled to wind up in December, and we're unlikely to see any changes in monetary policy unless inflation moves considerably higher in the second half of the year.

With the US labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn't pushed inflation to higher levels. The Federal Reserve is also at a loss to explain the lack of inflation, but Fed Chair Janet Yellen insists that it's only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was “premature to conclude that the underlying inflation trend is falling well short of 2 percent”, and that with a strong labor market “the conditions are in place for inflation to move up”. However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.

Fed policymakers weren't smiling after Friday's consumer inflation and spending numbers. CPI edged up to 0.0%, short of the forecast of 0.1%. There was no relief from Retail Sales, which declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it's no surprise that weak spending has also meant weak inflation, despite Yellen's claim that low inflation is a temporary phenomenon. The economy had a weak first quarter, with growth of just 1.4%. If the second quarter follows suit, investors could sour on the US dollar in favor of other assets, and the euro could take advantage.

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