DAX Loses Ground as Trump Loses Healthcare Vote, German CPI Next

The DAX index remains under pressure in the Friday session. In the European session, the DAX is at 12,125, down 0.79% on the day. On the release front, German Preliminary CPI is expected to remain unchanged at 0.2%. Later in the day, the US releases Advance GDP, with the estimate standing at 2.5%. If GDP is not within expectations, we could see some volatility from the German stock markets.

The German economy continues to impress, powered by strong global demand for German products and solid domestic demand. Consumers continue to give a thumbs-up to the economy, as underscored by GfK German Consumer Climate. The indicator strengthened for a fourth straight month, improving to 10.8 in the July report. This edged above the estimate of 10.7 points. Importantly, strong consumer confidence has translated into increased consumer spending, a key driver of economic growth. However, the fly in the ointment remains inflation, which is stuck at low levels. The lack of inflation is Germany and the rest of eurozone is a pressing concern for ECB policymakers, and there is little chance that the bank will end its quantitative easing program before December, if inflation levels don’t move upwards.

Global stock markets remain jittery as political risk in Washington continues to intensify. On Thursday, Trump’s troubled healthcare bill gasped its last breath, as the bill was defeated in the Senate after three Republican lawmakers joined the Democrats and voted against the bill. This is another setback for President Trump, who has been unable to get Congress to pass any significant legislation, despite the Republicans controlling both the House and the Senate. Trump will now focus on other issues such as tax reform, but investors are skeptical as to whether the President will have better luck with other bills.

With the Federal Reserve holding rates at 1.25% at this week’s policy meeting, attention shifted to the rate statement, as investors looked for clues about future rate moves. The statement was cautiously optimistic in tone, with policymakers saying that the economy was growing at a moderate pace and that the labor market remained strong. The statement made note of low inflation, but said that the Fed expected the economy to continue to expand. Another key issue on the Fed’s plate is the $4.2 trillion balance sheet. The rate statement said that the Fed plans to taper asset purchases “relatively soon”, which is a likely nod at September as the start date. This would involve the Fed tapering its purchases of Treasury bonds and mortgage securities, with an initial taper likely of $10 billion/month. Although the Fed continues to talk about another rate hike in 2017, investors remain skeptical. The rate statement did not change many minds, as the odds of rate increase in December stand at 47%, according to the CME Group.

Economic Calendar

• All Day – Germany Preliminary CPI. Estimate 0.2%
• 8:30 US Advance GDP. Estimate 2.5%

*All release times are EDT

*Key events are in bold

DAX, Friday, July 28 at 6:30 EDT

Open: 12,156.25 High: 12,156.25 Low: 12,096.50 Close: 12,116.00

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