Pro Perspectives 1/23/20

January 23, 2020

The European Central Bank met this morning and had no surprises for markets.

The ECB has already restarted QE, and now will likely wait to see if the data improves following the removal of the U.S./China trade war drama.  

The first indication will come tomorrow, with a "flash" estimate on January manufacturing activity.  As you can see in the chart below, Germany is in a manufacturing recession.

The estimate for tomorrow's report is for no improvement.  We'll see if there's a positive surprise, given that it has been more than a month (December 13th) since the U.S. and China formally agreed to terms and telegraphed a deal signing.  And mid-month (January 15th), we had the official signing of the deal. 

For stocks, it doesn't matter.  Against the wishes of many market folks, who would like to see a dip to buy, the formula of ultra-low rates, an expanding balance sheet, and deficit spending in the U.S. are overwhelming even risks of pandemic.   

What will put the brakes on stocks?  Ultimately, it will be rates.  But as you can see in the chart below, rates won't be a problem anytime soon. 


With stocks on record highs, the key market interest rate/ the 10-year yield traded as low as 1.71% today.  Yields were down around these levels when the global economy was beginning to look shaky enough to force the Fed to start expanding the balance sheet again (September), and force Trump to invite China into the Oval Office to signal/make a hand shake deal on trade (October). 
But unlike September and October, the level on market interest rates seems to be less about risk, and more about the global monetary policy, and a lack of new economic data that would suggest an inflationary threat.
On that note, the Fed has told us that they won't raise rates until they see "significant and persistent" inflation above their target.  With that statement in the minds of market participants, it won't take much hot economic data to start the betting that the Fed will be late, and end up chasing inflation from behind.  That "bet" should translate into a 10-year yield much higher than the current effective Fed funds target rate of 1.55%.