German Manufacturing PMI and Services PMI Drop More Than Expected

Today’s data showed a greater decline in economic activity than most analysts expected with Manufacturing PMI down to 40.3, and Services PMI down to 50.6.

The general consensus was for Manufacturing PMI to slow down to 42.4 and Services PMI to show a decline to 51. Both indicators have been declining since June this year. The data, even though worse than forecast, was not of surprise.

The recent poor results and deteriorating outlooks from Germany’s largest automakers, including a planned closing of two plants by Volkswagen prepped the markets. In fact, the DAX rose 0.4% in the first 30 minutes after the data release.

Sentiment is shifting towards BCE action on rates before the year end on the back of the recent FED cut of 50 basis points. Various pundits have voiced their opinion about the need for more rate cuts.

Fabio Panetta, council member of the Bank of Italy, has hinted at the need for a quick rate cutting cycle. Mario Centeno, an ECB rate setter, has suggested that the ECB may need accelerate the pace of cuts due GDP growth and inflation possibly falling short of expectations.

Technical View

The day chart above for the DAX shows a market technically in a bullish trend, above the Ichimoku cloud. Th recent rally that took the index to a new all-time high failed to produce a lot of momentum.

The RSI failed to go anywhere near the level of 70, an indication that the current bullish leg lacks drive. The same happened with the previous leg that took the market to the previous all-time high and failed to see the RSI above 70.

Today’s candle has met the resistance of a previous ATH of 18,785 (blue line). To the downside the immediate support is at 18,601 (black line), which coincides with an ATH from April. Below that level the market will find major support at the cloud.

To consider the market as in a full blown bullish trend, we need to see a close above the current ATH of 19,050 (red line), and the RSI above the level of 70.