Germany Slips into Recession:

Germany experienced a recession in the first quarter of 2023, with a 0.3% contraction in output compared to the previous three months. This followed a 0.5% decline in the fourth quarter of 2022, highlighting the impact of a winter recession on Europe’s primary growth driver.

ECB’s Efforts to Tackle Inflation:

To combat inflation, the ECB has gradually raised its key interest rate to 3.75% in seven steps. The central bank’s active interest rate policy, along with falling energy prices, has contributed to a lower inflation estimate compared to February. Inflation is gradually declining; however, it remains well above the ECB’s target of 2%, therefore bank officials reaffirmed its commitment to further hikes. Economists anticipate at least another 50-basis point rate increase in 2023, followed by a gradual decline in interest rates in the coming years.

Moderation in inflation:

While some positive indicators emerged from the economic data in Europe on Wednesday, such as a moderation in inflationary pressures across major economies like Germany and France, the overall sentiment remained dampened by the global economic outlook. The drop in headline inflation is encouraging and suggests that the disinflationary trend in Germany is gradually broadening. However, it is unlikely to prevent the European Central Bank from hiking rates again.

Long Road Ahead for ECB Inflation Target:

According to a survey conducted by the Mannheim-based institute, financial experts predict that the ECB’s inflation target of below 2% is unlikely to be achieved before 2026. Despite expectations of a gradual slowdown in inflation, rising wages are seen as a key driver of inflation, which is projected to remain high at 5.8% in 2023.

German Inflation and Wage Growth:

Germany has experienced a significant increase in nominal wages, rising 5.6% year-on-year in the first quarter of 2023, which is the highest level since 2008. However, high inflation has offset wage growth, resulting in a 2.3% decline in real wages during the same period. Collective bargaining negotiations and strikes have disrupted various sectors, raising concerns about excessive wage demands fuelling inflation further.

In conclusion:

Overall, Germany’s recession, the ECB’s inflationary challenges, and global economic uncertainties have created a complex landscape for financial markets. The ECB’s focus on controlling inflation remains a top priority, as inflation rates continue to be above target.

Source: Tradingview, DAX Index Yearly Chart

DAX outlook – technical analysis:

The DAX 40 climbed to a fresh all-time high of 16,331 in May despite the challenging global and regional macro backdrop. Bearish divergences between the leading Relative Strength Index (RSI) indicator and the price have formed on the weekly and daily charts, showing that internal momentum conditions are deteriorating.

While at this stage there is no confirmation the primary up trend is complete, the divergences are providing a preliminary warning that the up trend from the September 2022 low might be approaching an inflection point.

We are closely monitoring key static and dynamic support from the medium-term up trend line crossing at 15,770, as a break below it will be the first red flag in regard to the sustainability of the uptrend. A break below that level would signal a short-term top is in place which could trigger a decline to 15,140 first and potentially to 14,800 over the medium-term.