The capital markets are really in a watch-this-space mode right now and it seems fairly logical that range trading in a number of asset classes could be seen in short-term, before a bigger move eventuates again.
Today’s US ADP payrolls and services ISM could throw even more interest behind a view that some share; that weather aside, there are issues which suggest a slowdown in growth could be on the cards in the world’s biggest economy. Of course, we are already seeing disinflationary signs in Europe and the negative feedback loop between lower equity prices and disinflation is real, and there really isn’t anything worse for a central bank to deal with than lower growth, high unemployment and falling inflation.
The ECB have one of the hardest jobs of any central bank right now and while deflation (or should I say disinflation) is still not the ECB’s base case, with falling money supply and inflation at levels mirroring what we saw through the GFC, they could show an increased level of concern in tomorrow’s ECB meeting.
The EUR could stage a modest rally if the bank don’t cut the refinancing rate, it’s worth highlighting there is even speculation they may even cut the deposit rate and thus charge banks to hold funds with the central bank. Naturally there could be sizeable unintended consequence around this policy and in reality the chance banks actually take these funds and lend is low. The prospect of buying foreign assets is higher; however the lion’s share of the reported headlines will fall on the potential for additional charges to be passed onto the consumer.
In Europe we get retail sales and the regions service sector survey and again weak numbers here and bids should return to the fixed income market, while EUR/USD could head to channel support at 1.3440.
In the world’s central bankers we trust
Still, in the worlds bankers we continue to trust, and we have to have faith that the BoJ cannot just engineer inflation of 2%, but actually promote real wage growth; a fate the Japanese finance minister has been talking about publically today. We need to have faith that the Fed can engineer a taper of the QE program effectively and that could mean increasing the taper amount or even keeping the pace of buying unchanged (taper the taper). We know Fed members Jeffrey Lacker and Richard Fisher aren’t overly concerned with the moves in equities and the volatility in the S&P 500 won’t deter them on their views on tapering.
On a side note, many consider Fisher to be an uber-hawk, but it’s important to note he is calling for 2% growth in the US this year (80bp below the markets consensus) – surely his view on tapering then is based on the ineffectiveness of the program and not on economic factors. A very strange type of hawkishness.
We also need to believe the ECB can judge inflation correctly and not leave things too late, as their forecasts continue to show inflation heading high. The RBA need to judge not just inflation correctly, but also the currency and as long as AUD/USD satay under 0.9100 they shouldn’t be overly concerned.
There are a number of economists who have pushed back their rate cut calls of late, preferring to look through the recent inflation data, highlighting factors such as above average weather forces. How ironic that the RBA has moved to a ‘neutral’ setting on policy (subsequently causing a massive position squeeze in the AUD) due to hot weather issues (and the impact on inflation), while in the US cold weather patterns have some thinking the Fed could even hold off from become less loose, causing USD selling. It’s also ironic that developed markets have tried, failed and desperately need higher inflation forces, while emerging markets need lower inflation to promote higher ‘real’ interest rates.
Corporate earnings still worth watching, despite macro concerns
Inflation is the key for many in the market right now and inflation expectations will be at the heart of moves in all assets going forward. However, while traders and investors will continue to look at inflation inputs in earnest, we need to remember that corporate earnings roll in from all geographies. In the US we still have just over 40% of earnings, while Europe’s and Japans are getting into gear.
In Australia the 1H earnings are trickling in and this probably explains the lack of conviction today from traders and investors to put on any new positions today until better clarity resumes.
The ASX looks as though it wants to test the 2012 uptrend support around 5050 and there seems a huge missing catalyst for the market right now to drive stocks higher. The catalyst has to come from earnings guidance.
In Europe the main focus will be on European and US data, however on a corporate front Glaxo come to market with earnings. Traders will also be keen to listen to narrative from Fed presidents Dennis Lockhart, Charles Plosser and Daniel Tarullo.