The Weekly Update

Central banks were front and centre last week with significant dovish comments from Draghi and others at the annual European Central Bank Forum and from the Fed rates announcement. Optimistic market sentiment was boosted further by expectations of a reopening of US-China trade talks at the forthcoming G20, with a number of poor economic data readings having little dampening effect on the positive trend. US 10-year Treasury yields – after dipping below 2% midweek – closed out the week just 3 basis points lower but continued the 8-week downward trend to 2.05%. Meanwhile, the S&P 500 touched new-intraday-highs of 2,964, and closed the week up 2.2% at 2,950, with notable performance in energy stocks in-line with the bounce in oil prices. While equity markets are rising on expectations of lower-for-longer-rates helping prop flagging growth, credit markets are tightening over growth concerns and falling inflation expectations.

In a comprehensive speech, ECB President Mario Draghi concurred that, “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” Throughout the speech – and indeed across ECB commentators as the conference continues – markets interpreted a clear dovish signal that the ECB is likely to enact more monetary stimulus unless the economic outlook improves.

A similar dovish narrative came out of the Fed despite leaving the benchmark Fed funds rate unchanged. In the press conference Jerome Powell highlighted a shift away from a patient stance in the statement to acknowledge: ‘In light of increased uncertainties and muted inflation pressures, we now emphasize that the committee will closely monitor the implications of incoming information for the economic outlook, and will act as appropriate to sustain the expansion’.  Importantly, Powell noted ‘While the baseline outlook remains favorable, the question is whether these uncertainties will continue to weigh on the outlook and thus, call for additional monetary policy accommodation. Many FOMC participants now see that the case for somewhat more accommodative policy has strengthened.’

Looking to the week ahead we have Germany’s IFO Business Climate, Dallas Fed Manufacturing Index and the Chicago Fed National Activity Index on Monday, followed by France’s Business Confidence, Bank of Japan minutes and US Consumer Confidence, Richmond Fed Manufacturing Index and House Price data on Tuesday. On Wednesday there is further Consumer Confidence data out of France and Germany as well as US Trade Balance and Durable Goods data. Thursday sees Japan Retail Sales, China Industrial Profits, Eurozone Business Confidence and Germany CPI. On Friday, Japan releases CPI, Unemployment and Industrial Production figures, Eurozone CPI data comes out along with US data on Income Spending, Chicago PMI and Michigan Consumer Sentiment.

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