“We’re On The Brink Of Adventure. Don’t Spoil It With Questions”.

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I know I go on about this, but there feels a real disconnect in the world today; strategists are undeniably bullish, and the question is not whether equities will go up but just by how much. When I say equities, I mean primarily US ones, and then, by implication, the rest of the world will be dragged along with them. The inverted yield curve continues to signal a recession if less than it did. The market assumption is that any recession will be just deep enough to trigger the Fed to start cutting rates but not deep enough to throw the US economy and, again, by implication, the rest of the world too much out of balance. That, in turn, will allow earnings to grow this year and meet analysts’ forecasts for indexes.

An inverted yield curve is when shorter-dated yields on government bonds are higher than longer-dated ones. This is not normal, as the longer one lends money, the greater the risk of repayment and the greater the likelihood the value of your money is eroded by inflation. This is why when the curve is inverted, it can often signal something is going array in the financial system. It is often when the inversion starts to unwind that stock markets correct. Why? Because the central bank sees the economy slowing, then reacts and lowers rates, it then takes time for the impact of additional stimulus to follow through into the economic system.

Yesterday was about earnings, and Texas Instruments offered a cautious outlook for the coming quarter as they warned that demand for chips from industry and autos was weak. Yet Netflix had a good day as it would appear all that working from home has resulted in an increase in subscribers. It is an interesting window into US economic activity overall. As the week progresses we will see a focus return to central bank policy and economic data. The ECB meet on Thursday, and what comes from the post-meeting statement will be noteworthy. Central Bankers have been singing from the same song sheet for quite some time now. The German economy is not in great shape at present; three months on three months rolling inflation in the eurozone suggests prices are heading below the 2% target. Will there be a real change in tone, suggesting that rate cuts are much closer to the top of the agenda than they have been? How will the market interpret this news? Will this be a signal we could get a genuinely more dovish Fed when they meet in turn next week? Expected data includes euro-area S&P Global services and manufacturing PMIs. There is an absolute deluge of economic data coming out of the US tomorrow.