Post date: 13/01/2020 11:00

2020 is starting on a positive note in financial markets. News that the US-Iran conflict remains contained for now, prospects for a Us-China trade deal, and good news from the world’s major economies pushed stock markets worldwide to record highs. The dollar put in a mixed performance, up sharply against risk havens like the Japanese Yen but down against most major emerging market currencies, the main beneficiaries from the festive mood in markets. This week the focus shifts back to macroeconomics, including US inflation on Tuesday, the UK inflation report and Industrial production in the Eurozone, out on Wednesday, and retail sales in the US, out on Thursday. The publication of the ECB minutes and speeches by central bank officials in both sides of the Atlantic should also provide some volatility.


Governor Carey signalled a more dovish outlook from the Bank of England last week, though the impact on Sterling was limited. However, we think market pricing of a cut in the medium term is not yet justified. We look to the Inflation Report on Wednesday and other second-tier releases to provide evidence that the economy is on firmer ground now that uncertainty over Brexit is much diminished. The large upward revision in the PMI indices of business activity we saw last week already points in this direction. We remain positive on the Pound medium-term prospects.


The turn for the better in Eurozone economic data has gone remarkably unreported, in our view. Last week, December PMI indices of business activity underwent a large upward revision, and the composite index is now firmly within expansionary territory. Retail sales data was also strong, and core inflation at 1.3% remains at the top of the recent range. Negative European rates continue to weigh somewhat on the common currency. We think the ECB minutes for the December meeting this week may alleviate somewhat market concerns about further cuts or increase in QE from the central bank, providing modest support for the common currency.


The labor market report for December provided the best of both worlds for equity markets, with job creation modestly above labor force growth and no sign of wage acceleration. This data pushes any prospect for policy tightening further and further into the horizon, and risk assets in general are reacting accordingly. This week’s critical data point will be CPI inflation, out on Wednesday. The core index excluding volatile food and energy components should remain above the Fed 2% target, but without evidence of acceleration in wage growth we expect the central bank to look through this data.