Wall St close to record high; GBP set for another weekly gain

Summary:

• Wall St. looks to end good week at record high

• UK stocks and GBP on track for another weekly gain

• DE30: Stocks grind subtly higher as investors digest ECB’s package

• Is US inflation a sign of economic strength?

It’s been another good week on the whole for US stock markets with gains seen in all the main benchmarks after more good news on the US-China trade front. After a couple weeks of gains that were driven in part by improving rhetoric on trade tensions, the past few days have seen the first tangible acts with the US announcing a 2-week delay on the October tariffs and China announcing that it would not impose additional tariffs on soybeans, pork and other agricultural goods. The S&P500 futures have made a strong push up through the 3000 mark to trade just 5 points from the all-time high of 3029.

Compared to last week, the current one has been less eventful on the Brexit front, with UK assets stabilising as the heightened drama subsides a little - at least for the time being. The pound is the best performing G10 currency once more, making the largest gains against the Japanese yen, and with talk of a possible compromise on the backstop that would cover just Northern Ireland the prospects of an agreement are improving slightly once more. The pound is rising once more with gains seen on the week across the board. The largest appreciation can be seen against the JPY and NZD.

Thursday’s ECB meeting was one of the most eagerly anticipated events of the year and it didn’t fail to deliver with volatile moves seen across several asset classes. The central bank unveiled a large-scale stimulus package that was broadly in keeping with market expectations - while the size of the QE at €20B/month was less than expected this was more than offset by the term being described as indefinite, after most had expected a fixed programme of 9-12 months - and the initial reaction was what one would expect after another “Draghi bazooka”, as stocks and bonds soared while the Euro tumbled. However, these moves reversed during the Draghi press conference 45 minutes after the initial announcement and while this could be attributed to a simple buy-the-fact-sell-the-rumour type of move there were 3 points from the presser which could be attributed to causing the reversal. 

A release of the US inflation data was a bit overshadowed by the ECB meeting but it sure helped push EURUSD towards 2019 lows before the tiering details fueled the rally on the pair. When the Fed meets next week they will need to consider if core inflation above 2% and rising is a sign of robust demand or a tendency that will actually undermine purchasing power going forward. That inflation measure ticked up to 2.4% y/y on higher healthcare and recreation costs and normally that would prevent the central bank from cutting rates. However, core CPI is way above the PCE (more spending oriented measure) which the Fed targets. This dilemma will likely only become more serious: as tariffs bite inflation could increase further without necessarily reflecting buoyant consumer (which seems to be the case so far as retail sales data suggests but can fade in coming months).