The DAX index has dipped lower on Wednesday, giving up the slight gains from the Tuesday session. The index is down 0.51% and is currently at 12,743.50 points. On the release front, there are no major events in Germany or the eurozone. German 30-year bonds sold for 1.02% at auction, lower than the May release of 1.24%.
Germany’s economy, the largest in the eurozone, continues to receive a thumbs-up from experts. On Tuesday, the German BDI Federation of Industry added its voice to the chorus, saying that Germany’s economic output would increase by 1.5% in 2017. However, the BDI noted that the economy had been buoyed by a weaker euro, lower oil prices and the ECB’s accommodative monetary policy. All three of these are ‘external factors’, in the sense that Germany has limited influence on them, and a significant change in any one factor could hamper the country’s economy. In the meantime, a growing global demand for German products has boosted the export sector and relieved concerns about President Trump’s protectionist ‘America first’ stance. There was another bullish forecast from the Ifo economic institute revised its prediction for Germany’s GDP for 2017 from 1.8% to 2.0%, and economic growth from 1.5% to 1.8%. The report also forecast that inflation would jump to 1.7% in 2017, up from 0.6% in 2016. Stronger economic conditions in Germany have helped raise growth in the eurozone in 2017, although inflation levels in both Germany and the euro-area have been sluggish. This has prompted the ECB to reiterate that it has no plans to tighten monetary policy until inflation moves higher.
The Fed is done with rates hikes for now, but has hinted at one more rate hike in the second half of 2017. As for the markets, they have circled the December policy meeting as the most likely date for a rate move. The CME Group has pegged the odds of a September hike at just 13%, compared to 18% a week ago. However, the odds for a December increase are at 49%, and this could increase if Fed policymakers continue to wax positive about the economy. Earlier this week, Federal Reserve of New York President Charles Dudley continued the upbeat message, cautioning the Fed against halting its current tightening cycle. Dudley said that the tight labor market should lead to higher wages, which in turn would push inflation to the Fed’s target of 2.0%. The markets like what they are hearing – not just the positive spin on the economy, but also that the Fed has signaled that it plans to reduce the bloated balance sheet of $4.2 trillion.
