European stock markets soar as ECB dampens hopes of rate hike

The DAX index has steadied on Friday, after posting sharp gains on Thursday. Currently, the DAX is at 13,104, down 0.04% on the day. On the release front, German WPI posted a strong gain of 0.8%, well above the estimate of 0.3%. In the eurozone, Final CPI rose to 1.9% and Final Flash CPI climbed to 1.1.%, as both readings matched their estimates. As well, the eurozone trade surplus narrowed to EUR 18.1 billion, shy of the estimate of EUR 21.2 billion.

It has been a week of contrasts from the Federal Reserve and the ECB. The Fed raised rates by a quarter-point, and the rate statement was hawkish, reflecting a booming US economy, with a tight labor market and strong spending by consumers and businesses. Just a day later, the ECB announced that it was winding up its stimulus program this year. However, the ECB added that that interest rates would remain steady “at least through the summer of 2019”, giving policymakers plenty of wiggle-room to delay any rate hikes. This sent German and French markets sharply higher on Thursday – the DAX jumped 1.9% and the CAC climbed 2.3%, while the euro dropped sharply. The ECB pledged to taper its bond-purchase program to EUR 15 billion/mth, in October, down from the current pace of EUR 30 billion/mth. The program will wind up at the end of the year. Draghi sounded dovish in his press conference, saying that the eurozone economy was facing “increasing uncertainty”. Draghi was likely referring to the G-7 meeting which ended in disarray as well as the election of a euro-sceptic government in Italy. The ECB also lowered its growth forecast for the eurozone to 2.1%, down from 2.4% earlier this year.

As widely expected, the Federal Reserve raised interest rates by a quarter-point, to a range between 1.75 percent and 2.00 percent. Fed Chair Jerome Powell sounded hawkish in his press conference, saying that the economy was performing well and that “overall outlook for growth remains favorable”. This message echoed the rate statement, in which policymakers said that “economic activity has been rising at a solid rate”, pointing to stronger consumer spending and business investment. What was may have been the most notable development was that the Fed rate projections were revised upwards, predicting two additional rate hikes in 2018, for a total of four hikes. Until now, the Fed had projected three rate hikes this year. This represents a nod to the strength of the U.S economy and could boost the dollar against its rivals.

Friday (June 15)

• 2:00 German WPI. Estimate 0.3%. Actual 0.8%

• 5:00 Eurozone Final CPI. Estimate 1.9%. Actual 1.9%

• 5:00 Eurozone Final Core CPI. Estimate 1.1%. Actual 1.1%

• 5:00 Eurozone Trade Balance. Estimate 20.2B. Actual 18.1B