DAX Edges Upward, Eurozone CPI Softens but Matches Forecast

The DAX index has edged higher in the Friday session, gaining 0.27 percent. The index is currently at 12,729.00 points. There were no surprises on the inflation front, as Eurozone Final CPI in May dropped to 1.4%, matching the estimate. Still, this reading marked the weakest Final CPI release in 2017, and was down sharply from the April release of 1.9%.

The ECB continues to hold the course with an ultra-accommodative monetary policy, in order to improve growth and raise inflation levels. ECB President Mario Draghi has acknowledged that economic conditions have improved in the euro-area, but appears in no rush to make any significant changes. However, one major player has long been unhappy with this stance, and the complaints are getting louder. Germany wants to see a tighter policy out of Brussels, arguing that the current low-interest environment is hurting savers and is ill-fitted to Germany’s strong economy. On Tuesday, German finance minister Wolfgang Schaeuble bluntly called on the ECB to change its policy in a “timely manner”. For its part, the cautious ECB has argued that it must keep its asset-purchase program and low interest rates in place while inflation remains at low levels. However, with Germany facing elections in September, the pressure on the ECB to tighten policy will only increase, especially if key indicators continue to point higher.

There was some positive news for embattled Greece, as eurozone lenders and the International Monetary Fund agreed to a bailout earlier this week. Under the terms of the agreement, the eurozone will provide Greece with a total of EUR 8.5 billion – 7.7 billion in early July, and 0.8 billion at a later time. The IMF has also pledged to provide funds, but not before it receives details of Greece’s debt sustainability. The deal comes at a critical time for Greece, which despite severe austerity measures, finds itself again on the verge of default. The Greek government has implemented tax hikes and pension cuts, and is hoping that the battered economy has turned the corner with this injection of funds.

Following weeks of broad hints that a rate hike was coming, the Federal Reserve pressed the rate trigger at this week’s June meeting, marking its second rate hike in 2017. The Fed increased rates by 25 basis points, to a target range of 1.00 percent to 1.25 percent. Fed policymakers sounded upbeat in the rate statement, which that was more hawkish than expected. The statement portrayed an optimistic picture, noting that the economy was growing and the labor market remained strong. Concerns over low inflation were brushed aside, as the statement noted that although inflation remains below the Fed’s target of 2.0%, it expected that target to be reached in the “medium term”. The Fed projected one more rate hike in 2017, and analysts were quick to circle December meeting as the most likely date. However, the markets don’t appear to share the Fed’s optimism as far as another rate hike this year. The odds for a September increase are at 18%, compared to 23% a week ago, according to the CME Group. As for a December increase, the odds stand at just 38%.

Fed Sees Another Hike Despite Low Inflation

Economic Calendar

Friday (June 16)

• 5:00 Eurozone Final CPI. Estimate 1.4%
• 5:00 Eurozone Final Core CPI. Estimate 0.9%
• All Day – ECOFIN Meetings

*All release times are EDT

*Key events are in bold

DAX, Friday, June 16 at 7:35 EDT

Open: 12,723.93 High: 12,764.50 Low: 12,718.25 Close: 12,729.00

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