European markets: Europe's economic expansion wavers while UK grapples with persistent inflation

The release of key economic data last week has increased suspicions that the European economy’s expansion is slowing while the UK continues to grapple with stubborn inflation.

Euro Area data signals a slowing economy

Last week, following the release of soggy industrial production data earlier this month, the Euro Area Composite PMI fell to 53.3 in May from 54.1 in April, mainly due to a deepening contraction in manufacturing (44.6 from 45.8). The Services PMI ticked lower to 55.9 from 56.2.

Further fuelling slowdown suspicions last week, the German Ifo Business climate indicator fell to 91.7 in May from 93.6 in April. The fall was the index’s first monthly decline in six months. Expectations for the coming months were also more pessimistic, falling to 88.6 from 91.7 in April.

UK's strong growth marred by stubborn inflation

In the UK, activity this year has been stronger than most expected, supported by falling energy prices, a robust labour market and an elevated savings rate. However, while growth has been stronger than expected, so has inflation.

Last week, headline inflation fell to 8.7% YoY in April, significantly stronger than the fall to 8.2% expected. The core rate, which excludes food and energy, jumped to 6.8%, the highest since March 1992 and above well forecasts of 6.2%.

The UK rates market is now pricing four more 25bp rate hikes from the BoE for a terminal rate of 5.50% by year-end.

DAX technical analysis

Weaker than expected Euro Area data and debt ceiling concerns saw the DAX retreat from its all-time 16,375 high last week towards the key 15,700 support level (coming from the highs in February and March and uptrend support from the October 11,829 low).

While the DAX holds above support at 15,700, a retest and break of recent highs is possible. However, should the DAX see a sustained break of support at 15,700, a deeper decline is expected to unfold towards year-to-date lows and the 200-day moving average 14,600/500 area.

DAX daily chart

FTSE technical analysis

The release of stubbornly high inflation data last week on top of debt ceiling concerns saw the FTSE pullback toward the 200-day moving average at 7526. While the FTSE remains above 7526, a rebound towards the resistance 7800/7900 area is possible.

However, should the FTSE see a sustained break of the 200-day moving average at 7526, a deeper decline is expected towards support at 7300/7200, coming from year-to-date lows.

FTSE daily chart

_{TradingView: the figures stated are as of May 30, 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.}