DAX, CAC 40, Stoxx 50 indices cheerful ahead of ECB decision

European indices are hovering near their highest points this year as traders wait for the upcoming ECB interest rate decision. The DAX index was trading at its record high of €16,800 while the CAC 40 was at €7,530. Also, the Euro Stoxx 50 index surged to €4,530, its highest point since 2001.

ECB decision ahead

European stocks will be in the spotlight as the European Central Bank (ECB) delivers its final rate decision of the year. In it, economists believe that the bank will decide to leave its key interest rates unchanged for the third straight time. It will leave the main interest rates at an all-time high of 4.50%.

There are two reasons why the ECB will be dovish. First, there are signs that the bank is achieving its inflation goals. The most recent economic data showed that the bloc’s inflation dropped to 2.4% in November as energy prices dropped. As such, the bank will argue that higher interest rates are not needed to achieve this rate.

Second, the European economy is not doing well. The most recent data by Eurostat revealed that the European GDP contracted by 0.1% in the third quarter. Germany, the engine that powers Europe, also dropped by 0.3%.

Additional data by S&P Global revealed that Europe’s manufacturing and services PMIs remained below 50 in November. A PMI reading of less than 50 is a sign that a sector is in a contraction mode.

Further, high-interest rates have led to liquidity concerns in Europe as money supply drops. In September, money supply shrank for the first time in 13 years, making it difficult for people and businesses to borrow.

Federal Reserve decision

The ECB decision will mirror that of the Federal Reserve. In its monetary policy decision on Wednesday, the Fed decided to leave interest rates unchanged between 5.25% and 5.50%. The bank also continued deliberations on future rate cuts. Officials are now anticipating at least three cuts in 2024.

America’s inflation has been falling, albeit at a slower pace. Data published on Tuesday revealed that the headline Consumer Price Index (CPI) dropped from 3.2% in October to 3.1% in November. Core inflation remained unchanged at 4.0%.

The actions of the Federal Reserve have an immediate impact on DAX, CAC 40, and Stoxx 50 constituents. For one, most of these companies have huge operations in the United States. Most of them also carry dollar debt in their balance sheet. In a note, analysts at ING said: