European Update – Bad news is good news

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.

Economic Calendar

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.