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Pricing Power vs. Production Woes: Why DAX engine is overheating?
Germany now on crossroads, digesting the 4.1% increase and a drop in Industrial Production of 1.5% causing dilemma on price increment and production as to how the market will assess their sentiment.
Concerns are mounting that a 4.1% spike in costs (Wholesale Price Index)combined with shrinking production will trigger a severe margin squeeze, as companies struggle to pass higher prices to consumers. This creates a policy dilemma for the European Central Bank, where a -1.5% industrial downturn signals a need for rate cuts that runaway inflation might now block, depriving the DAX (GER30) of expected financial support. Consequently, investors are caught between the sudden pressure of rising prices and the cooling effect of a manufacturing, market activity has become unpredictable.
Which economic indicators will affect the DAX (GER30) this week?
Eurozone Industrial Production (MoM) April 15 Forecast 0.2% Previous -1.5%
Eurozone Inflation Rate Final (YoY) April 16 Forecast 2.3% Previous 2.4%
Eurozone Balance of Trade April 17 Forecast 11.1B Previous -1.9B
How factories and mines affect the stock market in Germany?
With the good indicators results from WPI (Wholesale Price Index) as Germany’s business core since businesses pass the costs to the consumers, there is an indication here that the country is expecting a higher inflation. The WPI forecasted at 1% now figures shown were 4.1% beyond the market expectations. After the report was released, the market behaved from sharp increase to flattening. Chart below 1-minute.
EUROZONE INDUSTRIAL PRODUCTION
IMPACT ON DAX (GER30)
The Production data is down at -1.3% on March 13 release below the forecast of 0.6% which is worse than expected results. From the 60-minute chart shows its reaction, though industrial data was worse than expected (-1.5%), the chart is seen the price eventually moved bullish. If the figures will come out below the forecast, we expect 60% chance of bullish market. If the market is within the actual forecast, we still expect at 66.6% chance of bullish trend. For over forecast, we expect a chance of neutral trend.
EUROZONE CPI (CONSUMER PRICE INDEX) FINAL
IMPACT ON DAX (GER30)
The DAX (GER30) is currently in a distribution phase. It is finding support near 23,742, but without a recovery in industrial production (forecasted for tomorrow, April 15), the 4.1% inflation shock makes it very difficult for the index to break back above recent highs.
Corporate profits may drop with negative effects due to rising inputs and dropping output.
If the central bank (European Central Bank) tends to higher rates, elevated interest rates lead to lower stock valuations, as investors become less willing to pay high prices for future profits when safer returns are available elsewhere. We also expect bearish on the industrial sentiment and energy costs as contributing factor from the recent geopolitical issues.
Major components in energy sectors like Chemicals (BASF, Bayer) and Heavy Industry (Thyssenkrupp) are hit hardest because they struggle to pass these rapid cost increases onto consumers when demand is weak.
EUROZONE BALANCE OF TRADE
IMPACT ON DAX (GER30)
The Euro Area Balance of Trade flipping to a -€1.9B deficit is a major warning sign for the GER30 because it suggests the region is spending more on imports than it is earning from its famous exports. This indicates that demand for German products like machines and automobile may be weakening or that the rising cost of imported energy is draining the economic wealth. For the stock market, this means the primary engine of Europe is losing its competitive edge, which typically pushes company valuations lower. Consequently, investors see a trade deficit as a sign of economic cooling, often leading to a downward trend in the index as seen in your recent charts.
What trend do we expect to see from the DAX performance?
From the daily chart, we see a short bullish trend from the index.
DAILY CHART
4-HOUR CHART
We remain to stick with 23580.87 based on the 4-hour chart which is near the 23358 if we view from the daily chart.
We see neutral to bearish since the price on both frames might break on price level 23580. This would signal as well from the Euro indicators as factors making the index to decline.
- Resistance 1 at 24097
- Resistance 2 at 24562
- Support 1 at 23471.26 near the 50% of Fibonacci Retracement
- Support 2 at 23359
- Support 3 at 22575 (if the declining margins in corporate financial structures impacting across industries with the costs and revenue to remain flat or declining which may result to trade deficit).
Conclusion & The ACY Edge
The German economy costs have gone up by 4.1% and industrial production has dropped by 1.5%. This makes it complicated for the European Central Bank to its decision on interest rate as they need to help the economy which is gradually slowing down while dealing with rising inflation. The GER30 is being unpredictable because investors are waiting to see if industrial output will get better. They want to know if it will improve before costs cause a bigger market problem.
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