DAX rises ahead of German IFO business climate data – Daily Market Brief, December 19, 2022

The DAX is set to rise after losses last week as attention turns to the IFO business climate survey. Improving business morale could point to a less severe German recession.

·         Stocks fell sharply last week after the Fed & the ECB indicated more rate hikes in 2023

·         US core PCE inflation data is likely to be the main focus this week

·         USD/JPY falls to 136.00 after reports that the Japanese government could revise the BoJ inflation target

European stocks fell sharply last week as investors digested a more hawkish outlook from the European Central Bank. While the ECB slowed the pace of rate hikes, it signaled that significantly more hikes were needed to lower inflation towards the 2% target. The DAX fell for a straight week, dropping to a five-week low. Meanwhile, the FTSE fell to a four-week low.

A similar narrative sent U.S. stocks tumbling last week. The Federal Reserve slowed the pace of rate hikes as was broadly expected to 50 basis points as inflation cooled. However, the Fed also pointed to a higher terminal rate in 2023, suggesting that inflation will be stickier than initially feared. The S&P500 fell for a second straight week.

Quieter week

This week sees a quieter economic calendar, although there are still some releases that could rock the market. The main focus will be on core PCE data on Friday, the Fed’s preferred inflation measure, which is expected to confirm a further slowdown in prices in November. U.S. consumer confidence and the final reading of Q3 GDP will be under the spotlight.

Today, European indices are pointing to a mildly positive start despite weakness in Asia amid some concerns about rising Covid cases in China. The DAX is set to open 0.35% higher, the CAC is due to rise 0.4% on the open, and the FTSE 0.35%.

German IFO business sentiment

Attention will be on the German IFO business climate survey for December, which is expected to show a modest improvement in business morale to 87.2, up from 86.3. The improved outlook is expected amid hopes that inflation is cooling and as full gas storage in Germany curbs fears of a supply crunch this winter. Improving business morale could suggest that the looming German recession could prove to be less severe than initially expected. The German government is expecting the economy to contract by 0.4% next year.

EUR/USD trades +0.5% at 1.635, heading towards the European open. Upbeat German data could help the euro higher.

USD/JPY

Elsewhere in the forex market, the Japanese yen is rising, outperforming its major peers after reports at the weekend suggested that the Japanese government plans to revise the BoJ’s inflation target to make it more flexible. Such a move indicates that there could be a potential policy shift at the Bank of Japan away from its ultra-accommodative stance, a stance which has weighed heavily on the yen as interest rates across the rest of the world has risen and has contributed to rising Japanese inflation which is currently at a level not seen for 40 years. Attention will move to the BoJ’s final meeting of the year on Tuesday, where the central bank is expected to hold interest rates at the ultra-low level of -0.1%.

USD/JPY trades -0.55% at 136.00 at the time of writing, extending losses from Friday.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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