Euro area core CPI slightly under shot expectations

The Day So Far

Markets have shrugged off yesterday’s very poor ISM Manufacturing survey reading, sub-50 for the first time since 2012, primarily because manufacturing’s share of the country’s GDP stands at 17%, its lowest contribution to US growth in the post-WWII era. The S&P enjoyed a strong move to 2100 through to the US close, and is consolidating above the 2100 handle this morning as investors steel themselves for ‘Super’ Mario Draghi in 24 hours time. The Fed has never raised interest rates with the ISM Manufacturing below 50 but expectations remained largely unchanged following the data release, reflecting the conviction that the Fed will move on rates a fortnight from today. This expectation is unlikely to be altered unless in the unlikely event we see a truly dreadful NFP print on Friday. On that note, we have a host of Fed speakers on the wires this afternoon including Fed Chair Yellen, although it would be a major surprise if they were to deviate too much from the recent hawkish tone so look for the dollar to stay on the front foot versus other major currencies.

Elsewhere, euro area core CPI slightly undershot expectations, coming in at 0.90% y/y against exp. 1.10%. This has led to a predictable “QE is coming!” trade, with the euro crashing below 1.06 handle, European equities charging higher and the Bund challenging the November highs as hopes rise that the ECB now have no choice but to further increase stimulus. Finally, WTI crude continued to trade lower following another build in inventory last night announced by the API, the 10th in succession, once again testing the $41.30 level. We advise staying short ahead of the OPEC showdown on Friday.

The Afternoon View

Look out for ADP employment change today at 13:15 BST to set expectations for Friday’s NFP, plus the aforementioned Fed speakers starting with Lockhart at 13:10 BST. There is also the Department of Energy’s inventory report, which probably retains less significance this week due to he OPEC meeting on Friday. Only a major drawdown would cause us to change our bearish take on crude on an intra-day basis. Long the S&P off the previous range high is our preferred equity play, although today’s pivot is also a good level for those looking for a more conservative entry. Short euro once more and long t notes from the previous November highs are our other calls for this afternoon.

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