DAX40 outlook with German PMIs

The leading business barometer is expected to decline once again, potentially dragging on the DAX ahead of an intense week of earnings.

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Getting a jump on the numbers

German Flash PMIs tend to shape market sentiment for the European session and can affect the DAX's performance for the day. But, France reports its PMIs fifteen minutes earlier, and if German numbers are in line with its neighbours, then the market will usually remain unchanged. France is also expected to report around a 1 full point drop in its PMIs.

The other factor that could impact German PMIs for July is timing. The survey is ongoing, but a substantial number of the businesses surveyed responded over the last week or so when there was considerable concern that Russia wouldn't restart gas shipments. It was just Wednesday that gas shipments were resumed but at a lower level. It wouldn't be surprising if German businesses were less optimistic because of that.

What's expected from the data

German Flash July Manufacturing PMI is forecast to drop to 50.6 from 52.0, while Services PMI is forecast to drop to 51.2 from 52.4. Both figures are expected to remain in expansion, but just barely. The manufacturing figure is of most concern since a relatively small miss of just 0.7pts could put it into contraction territory and shake up the markets a bit.

Potential reasons for a beat of expectations could be based on PPI data that came out yesterday, showing a slight drop and below expectations. Prices paid by German businesses had been repeatedly breaking multi-decade highs, and the relief could help provide more optimism to German firms. However, the issue remains that even as German corporate profits increase, they aren't doing so at a rate above inflation, which could continue to keep pressure on the DAX through the rest of the earnings season.

DAX flirts with 50-day SMA

The index has been in bullish mode since the 12380 low of July 5th but the move got stopped at the 50-day average of 13440 on Wednesday. Although it remains uncertain if it breaks, the divergence observed on the stochastic indicator suggests some momentum accompanies the upward leg. So, the 13690-13785 gap could be the next level of resistance, and if that gives in, the 200-day average of 14450 might be next.

However, currently at overbought levels, a pullback down to 13030 can be expected. But things could turn for the worse if the support weakens as prices would return into the 12380-13030 range, and this would increase the chances of a breakdown. Below there, the round level of 12000 is support.

Source: Spreadex trading platform

Key takeaways

German PMIs will likely affect the European session if they diverge from the French PMIs reported 15 minutes earlier. Otherwise, the market could remain unchanged unless the PMIs have been impacted by the timing of the survey as most businesses were less optimistic about gas shipments last week.

German Manufacturing is forecasted to drop 0.7pts above contraction, and it will be the main report of focus for investors. Despite PPI showing corporate profits have been improving, it has a lot of catch-up to do with inflation.