The Ahead: We are ‘in a good place’, aren’t we?

What do you get when you mix a 17-year old daughter of an opera singer with a thrice-married 72-year old former reality TV star? We should find out this week as a lively start to the year is about to get even more interesting whenenvironmentalist Greta Thunberg meets President Trump atthe annual World Economic Forum in Davos.

Although headline-grabbing, markets will be more focused on the central bankers who may use the opportunity to reflect on their upcoming strategic reviews. Watch out too for Treasury Secretary Mnuchin, who sparked a dollar sell-off and a shift in US policy in 2017, when he said a weaker dollar was good for the US.

We leave an eventful week for markets and head into onepacked with central bank activity and data. The persistent, low volatility risk rally currently shows no signs of stopping any time soon with plentiful liquidity, improving data and encouraging US earnings all adding to the exuberant cocktail.The latest leg up in US stocks came as several largeinvestment banks posted record earnings, signalling a solid start to the fourth-quarter reporting season. Many analysts now expect corporate America will deliver its first earnings growth since the end of 2018. The second week of resultscontinues with more than 40 S&P 500 companies releasing earnings, including Netflix and Intel.

After last week’s signing of the China-US phase one trade deal, risk sentiment has also been supported by the Chinese growth figures released on Friday which reassured investors about the relative health over the world’s second-largest economy. Shock horror, Chinese GDP grew with a six-handle (6.1% to be precise!) in 2019 with the monthly data indicatingthat momentum has improved heading into the new year.

This week sees three major central banks meet, with very little expected from the first of those, the Bank of Japan, who convene on Tuesday. There may be an upward revision of the growth forecast due to the government’s spending package,but no changes are expected in Tokyo. The Bank of Canada will similarly remain on hold, but markets may still be concerned about the weak Q4 growth trends and the potential for some dovishness in the bank’s outlook. However, global growth headwinds are abating as trade deals are put to bed, so it’s likely Governor Poloz will again defer to wait-and-see mode.

New President Christine Lagarde’s second monetary policy meeting at the ECB on Thursday will be keenly watched as there is some hope that she can adopt a slightly more hawkish stance, at least more so than her predecessor, Mario Draghi. Core inflation has picked up a bit and activity indicators are less bad. Last week’s minutes from her first meeting alsohighlighted a happier Governing Council, though it’s surely way too early to expect any debate around a shift in the assessment of balance of risks to ‘neutral’. With volatility in EUR/USD close to record lows, the potential for a bout of ECB-induced excitement is rising, especially if economic data in the Eurozone this week points to a further rebound in activity. 

Finally, we get the first ‘real’ post-election indicator in the UK with the release of the PMI figures on Friday. As we have written about recently, odds for a rate cut have spiked over the last week, with the dire retails sales data from Friday now pushing them to 75%. With inflation 70bp below target, and potentially more by mid-year, there doesn’t seem to be too much holding the MPC back, even if it’s an ‘insurance cut’. That said, many analysts are expecting the composite PMI print to be in expansionary territory for the first time since August last year. Interestingly, the 1.30 area in cable has beenlimiting losses so far, even with the market piling on bets of near-term BoE action.