Dovish hike from the ECB helps lift sentiment

• Asian markets end the week on a high after strong Chinese data
• ECB boost sentiment with dovish hike
• US markets look towards inflation expectations and industrial data

Asian markets enjoyed a strong end to the week, with a second Chinese rate cut in as many days coming via a 0.2% reduction in the 14-day reverse repo that took it to 1.95%. Coming off the back of a 25-basis point cut to the RRR on Thursday, it is clear that the PBoC are keeping busy in a bid to stabilize and support the Chinese economy. With a raft of better-than-expected data released overnight, we are seeing some hope that the Chinese economy may be showing signs of improvement after months of deterioration. Stronger industrial production, retail sales, and falling unemployment brought optimism across the spectrum, with manufacturers, consumers, and the jobs market all taking on a healthier look.

European markets have taken on a more constructive tone this week, with the FTSE 100 on track to enjoy its strongest week in 10-months. Coming at a time of concerns around China, energy-led inflation, and an economic slowdown, the ECB meeting provided some confidence that we may finally have reached the end of this tightening cycle. Cynics will look at the recent surge in energy prices as a risk for a second inflation wave. However, this week does allow the optimists some hope that we could start planning for the timing of rate cuts rather than rate hikes.

Yesterday’s ECB meeting rather predictably saw Lagarde temper the hawkishness of the hike through dovish comments, with the recent deterioration in European data signalling a need to take the foot off the gas for now. There will always be a data dependency from the central bank, as another spike in inflation would push the bank to take further action. However, we have seen a relief rally for some of the hardest hit sectors, with UK housebuilders outperforming on the premise that the BoE will similarly draw a line under their tightening phase when they meet next week.

Looking ahead, the US Empire state manufacturing index and industrial production data shine a light on a sector that has been hit hard this year. However, last month’s surprise 1% surge in industrial output provides a potential recovery theme that could build if we see another outperformance this time around. Inflation expectations also look to play a key role for traders, with last month seeing the Michigan gauge revised upwards (a second consecutive gain). With energy prices on the rise, another rise for inflation expectations could dent sentiment given the implications for consumers who may bring forward spending in the view that prices will rise at a faster rate in the future.