European indices update: Will weak PMI data encourage a more dovish tone at this week's ECB meeting?

In last week's update, we asked whether the DAX and the FTSE could follow the lead of US equity markets and trade and retest year-to-date highs.

While last week's lower-than-expected inflation print in the UK sparked a relief rally, the release of flash PMIs overnight pointed to further weakening of the growth momentum.

In the UK, the composite flash PMI fell by 2.1pts to 50.7, below consensus expectations of 52.3. The decline in the Composite index was broad-based across sectors but skewed towards services which fell to 51.5 vs 53 expected.

In Europe, the Composite, Manufacturing, and Services PMIs for France, Germany, and the Euro Area all declined and came in below consensus expectations. Of particular concern, the German Manufacturing PMI fell to 38.8 from 40.6 previously, the lowest reading except for the Covid-19 and GFC periods, a sure sign of a deep manufacturing recession.

While the market is looking for positive Euro Area growth in Q2 of 2023, ending the current technical recession (the Euro Zone entered a technical recession in Q1 of 2023), the risks of a double dip slowdown are increasing - A risk that even the most hawkish ECB members can hardly ignore ahead of Thursday's ECB meeting.

ECB interest rate meeting preview

Date: Thursday, July 27 at 10.15 pm AEST

At its meeting in June, the ECB raised the deposit rate facility by 25bps to 3.5%, as widely expected. The decision was accompanied by hawkish tones as the ECB's inflation projections for 2024 and 2025 were revised higher. ECB President Lagarde stated that a rate hike in July was very likely, and that the ECB was not considering a skip or a pause.

"Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation."

Despite signs of a further slowdown, including the confirmation that the Euro Zone entered a technical recession in Q1 of 2023, a 25bp rate hike to 3.75% this week is assumed to be a done deal.

The real interest will be on the communication for upcoming meetings and whether next week's hike will be the last or if more are to follow. If this week's hike is flagged as the last, it will trigger a dovish reaction, and the DAX may fly. However, it is equally possible that the ECB will leave the door open for another 25bp rate hike at the September meeting, which currently has about 14bp priced in.

ECB deposit rate chart

DAX technical analysis

In last week's update, we noted that the decline in the DAX from the mid-June 16,572 high to the 15,559 low unfolded in three waves, indicative of the pullback being a correction rather than a reversal lower.

From here, a sustained move above resistance at 16,350/375, ideally after Thursday's FED/ECB doubleheader, would confirm we are on the right track and open up a retest and break of the mid-June 16,572 high. Aware that if the DAX were to reject resistance at 16350/375, a retest of uptrend support at 15,750 is possible.

DAX daily chart

FTSE technical analysis

In last week's update, we noted that the FTSE had reached our downside target at the recent 7229 low, and should the FTSE reclaim trend line support at 7450 and the 200-day moving average at 7560ish, we would move to a more positive bias looking for the rally to extend, initially towards 7800.

The call above has worked out reasonably well. However, since the last update, the downtrend resistance from the 8047 February high has fallen from around 7800 to 7775.

The FTSE needs a sustained break above 7775/7810 to indicate a stronger recovery towards year-to-date highs is underway. Otherwise, a return to 7200 is possible.

FTSE daily chart

TradingView: the figures stated are as of July 25, 2023. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.