DAX 40 Pulls Back On The Week – Cooling Inflation, and Tariff Tensions Digested

The DAX is pulling back sharply to end the week, down 2.4% on the day, and 3.82% on the week, as markets pull back on shifting tariffs. With the vast majority of the index in the red today, Bayer AG shares are a rare ray of light.

German inflation has also fallen in reports released this week, to 1.8% in July. This figure is below the 1.9% anticipated by economists and down from the 2.0% recorded in June, aligning with the European Central Bank's (ECB) target.

The German inflation data revealed a bit of a mixed picture. Core inflation, which excludes volatile food and energy costs, remained steady at 2.7% whilst services inflation eased slightly from 3.3% to 3.1% in July.

The decline in headline inflation was primarily driven by a 3.4% year-on-year drop in energy prices, while food prices increased by 2.2%. The figures are harmonized across the euro zone to ensure comparability.

This disinflationary trend, while seemingly positive, arrives amidst concerns about broader economic stagnation.

While the index achieved an all-time high of 24,639.10 points early in July, August is kicking off with a different story altogether.

The cooling inflation has significant implications for the DAX 40.

Lower inflation could lead to expectations of sustained accommodative monetary policy from the ECB, potentially boosting investor confidence and supporting equity markets. However, the broader economic context presents challenges.

The German economy contracted by 0.1% in the second quarter of 2025, following a 0.3% growth in the first quarter. This stagnation is attributed to escalating global trade tensions, particularly from new U.S. tariffs imposed by President Donald Trump, which have adversely affected Germany's export-driven economy.

The ECB has expressed concerns that escalating trade tensions between the U.S. and China could drive Eurozone inflation further below its target. If the U.S. imposes steep tariffs on Chinese imports, leading to a redirection of goods towards Europe, this influx of cheaper products could suppress consumer prices.

ECB economists estimate that Eurozone imports from China could rise by up to 10% in 2026, potentially lowering inflation by 0.15 percentage points that year.

Analysts are closely watching how European and US companies will react to US tariffs. One scenario could see prices falling in the eurozone due to overcapacities and weaker sales in the US. Globally operating companies might try to actually increase prices in Europe in order to offset profit squeezing in the US.