Are central banks becoming the only game in town again?
It would appear that we’ve gone back a number of years to a time where bad news is actually good news in the markets, with a poor ADP number on Wednesday seemingly bringing some additional relief to stocks.
Source – Thomson Reuters Eikon
Once again we’re trading in the green on Thursday, with the US also seen edging a little higher, as traders opt to focus on the prospect of more central bank rate cuts rather than why they’re deemed necessary. With Trump making it clear that tariffs are his preferred weapon of choice, whether he’s facing an economic conflict or a border problem, the reality of a slowdown have weighed on the markets leaving investors with little choice but to hope the Fed and other come to the rescue. It’s been a while since that’s been the case.
The result is that we now appear back in the bizarre situation where weaker data, which pressures the central bank into rate cuts, lifts equity markets. On Wednesday, that was the ADP number which – while not being an overly reliable predictor of the NFP – was so bad that expectations for Friday will now be much lower. A bad report on Friday could put a rate cut this month realistically on the table, despite only currently being 20% priced in.
Moreover, a third rate cut this year is now more priced in that not, which seems remarkable when you consider that much of the US data has remained quite strong. With economic pessimism seemingly so backed, a poor report on Friday will not do those odds any favours and will further feed the belief that we’re heading for a tough second half of the year, one in which we’ll have to increasingly rely on the Fed and others.
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