Markets on the rise despite mixed CPI report

• European markets follow US stocks higher following CPI release
• ECB expected to cut by 25bp
• Jobless claims bring recession concerns back into focus

European equities are following their US counterparts higher following a session that saw a belated surge in tech stocks following an initial post CPI downturn. While traders have been weighing up the possibility of a 50-basis point rate cut next week, that appears to have largely gone out the window after a core CPI metric that posted the highest monthly figure since April. Nonetheless, while a bumper 50bp move appears to be largely disregarded, a calm cut from the Fed does ease the perception that the US economy is heading for recession and in need of drastic support. Will less than a week until the Fed cuts rates, the rise we are seeing in US stocks does allay fears of a deeper slump in equities as we head through the notoriously difficult September period. Nonetheless, with the US election less than two-months away, historical trends would indicate that we may have to wait until that political uncertainty is cleared before seeing the bulls take full control once again.

Today sees traders turn their attention to European affairs, with the ECB expected to cut rates for just the second time in five-years. With markets essentially viewing a 25-basis point cut as a foregone conclusion, much of the day’s focus will be on the outlook for the pace of easing going forward. However, for all the talk of potential 50bp cuts at the Fed, the ECB will want to ensure that the spread between US and Euro rates narrow rather than widen. As such, the pace of Fed tightening will play a key role in expectations around the ECB, and in all likeliness we will see a more steady approach to easing to avoid capital flight given the attractive risk-free return currently offered in the US.

In the US session, jobs will come back into focus as we continue to dissect the data with a view to understanding the potential for a recession. Despite the decline in unemployment seen in the recent jobs report, a surge in jobless claims could yet bring a risk-off tone into play. While we have seen a relatively confident tone from Powell and Yellen, markets do remain cautious after recession signal flashed from both unemployment rate liked Sahm rule, yield curve uninversion.