E Markets: Expectations

TGIF. The Friday rules for trading are in play with little but a Fed monetary policy conference to consider and more earnings. The heart and soul of the problem for markets in 2019 is that given the kitchen sink of negative interest rates and QE globally, why is inflation so tame?There is plenty to show for asset price inflation but even there a market of stocks dominates more than the stock markets.  The headlines on individual stocks are interesting in the US with Kraft-Heinz suffering after the close on its earnings miss and SEC investigation. The Goldman/Apple credit card has spawned a return to payment technology ideas. Make it clear, these stories are nice but not necessary to understanding this week’s price action. The view is that China is going to get a deal with the US and that its going to win with stimulus and growth. The Chinese stock market gains this week stand out and the manipulation of that market by authorities over the last month has worked to spark global interest. The other story that matters this week is that Europe isn’t falling off the face of the earth – as German GDP highlights much of the weakness in 4Q can be explained away by car inventory drawdowns suggesting some hope for growth in 2019 – if China stabilizes. Throw in that today’s core Eurozone CPI was up to 1.1% in the revision and you have many thinking that the ECB will be able to do nothing and look smart if it all just plays out with Trump and Xi as hoped.  This is the world we live in – one of expectations – where the rate of change in politics is more important than that of economics.  The hangovers from too much geopolitical worry stands out most clearly in the UK where Brexit and the UK May government look like tired stories where most people in the market don’t care to trade or focus anymore until they must – like when there is another vote or deadline that really matters. The USD has managed to hold steady again overnight despite the hope-a-thon of US/China trade talks and a steady uptick in shares globally. US capital inflows are stable like expectations that all will somehow work out. Gold lower, bonds mixed, Oil higher – all point to a good day ahead. That makes it interesting to watch the USD/CHF as it’s on the cross roads of safe-haven and the EUR where 1.0050 looks like an important pivot and its telling us that the world expects .98 before 1.02 which clashes with the risk-on in equities – something that doesn’t square with gold or JPY.  How the CHF plays out with the EUR and USD in the next few days may just foreshadow the real expectations for trouble ahead.

Question for the Day: Does IFO or Eurozone core inflation matter most? The EUR holds 1.1340 still and this despite the threat of US auto tariffs, ongoing weakness in surveys from PMI flashes to German ZEW to today’s German IFO. The view that Europe 1Q will stabilize and that the soft patch is just that – a return to trend growth – is the standard for much of the ECB. The hope that the ECB will do something to spark growth remains in play for the market as the data is watched. The clock is ticking against the ECB as the IFO business cycle clearly turns over.

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