June's Ifo business climate index for Germany is scheduled to be released on Monday. In May, the Ifo index rose by 1.6 points to 114.6 points and thus reached its highest level since 1991. The increase owed to the both upwardly revised assessments of current business situation and business expectations. In addition, such performance was consistent with 0.6% qoq expansion of German economy in the second quarter, following a 0.6% qoq expansion in the first quarter of the year. In other words, the Ifo supported the view that German economy is going full steam ahead.
However, I would not be surprised if we see an Ifo correction next week. After all, flash eurozone PMI composite index (released on Friday) recorded a fall from 56.8 points in May to 55.7 points in June, thus being at the lowest level in past five months. While the PMI manufacturing component still managed to rise slightly, the PMI services index fell from 56.3 points in May to 54.7 points in June. In addition, the European Commission sentiment index for the eurozone has fallen by 0.5 points to 109.2 in May, after increasing for the 14 months in a row. Moreover, after hitting the highest level since mid 2011, the European Commission sentiment index for Germany declined by 1.5 points to 109,5 in May. Bloomberg consensus currently suggests a 0.2 points Ifo index correction to 114.4 points in June but we might likely end up with a stronger correction, in line with other sentiment indicators. In such circumstances and given the absence of any earnings release on Monday, I see a good opportunity for DAX bears to enter the market.
On Friday, we will receive eurozone's consumer price data. Following an improvement in April, the eurozone inflation decreased from 1.9% to 1.4% in May. Furthermore, the 'core' inflation declined from 1.2% to 0.9%. Such movements were the main reason for the ECB to lower its inflation projections at their last meeting in June with this year average CPI inflation forecasted at 1.5%.
At the press conference Draghi said: "Looking ahead, on the basis of current futures prices for oil, headline inflation is likely to remain around current levels in the coming months. At the same time, measures of underlying inflation remain low and have yet to show convincing signs of a pick-up, as unutilized resources are still weighing on domestic price and wage formation."
Furthermore, Draghi clearly stated: "Therefore, a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term. If the outlook becomes less favorable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase program in terms of size and/or duration". Also, Draghi stated that the ECB Council expects that the eurozone interest rates stay around currently low levels for the prolonged period of time after the QE program ends.
Bloomberg consensus expectations suggest a 0.1pp decline in the yoy CPI inflation print to 1.3% yoy in June. This should be sufficient to remove any remaining doubts about the ECB early rate hike and push long term German yields slightly lower.
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