Inflation pick up proves irrelevant

Hesitation has dominated the markets ahead of the ECB meeting says Joshua Mahony, market analyst at IG

Inflation pick up proves irrelevant

Today can be marked down as another day of hesitation, as the anticipation of Thursday’s ECB meeting, coupled with the overextended nature of the recent rally means we have seen markets trade largely sideways or lower.

Weakness across both the euro and yen highlight the continued expectation that we will see easing in the near future, despite uncertainty over whether it will occur this month.

UK inflation data would have provided a boost to BoE officials in months gone by, as a gradual normalisation takes place to ease the threat of disinflation. However, we are now in a brave new post-Referendum world and the BoE is likely to forget its primary price stability mandate in favour of one focused on growth and jobs stabilisation.

As such, while a ‘remain’ vote would have seen today’s data as a clue that higher rates are around the corner, we are instead weighing up just how large the QE and rate cuts will be over the coming months and years.

The recent devaluation in sterling will mean that we are importing inflation rather than disinflation, which is likely to drive upward  revisions in next month’s BoE inflation report.

Goldman Sachs has announced a bumper set of results in Q2, with the firm beating estimates across the board in a continuation of the trend of US banks outperformance over the past week. Much of this will be down to pessimistic expectations as much as anything. After all, the latest figures still remain well behind the 2015 numbers, as we continue to feel the residual effect of an awful Q1.

The EU Referendum result will certainly negatively impact banks from a rate point of view, with margins likely to suffer. However, for the likes of Goldman Sachs, it is likely that they will see further gains made up on both M&A (capitalising on a weak pound) and trading (owing to positive effects of easy  monetary policy).

 

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