(12 JUNE 2019)DAILY MARKET BRIEF 2:Market pauses ahead of US CPI data

After rallying to a monthly high on Tuesday, equity markets consolidated on Wednesday. Front month futures on the S&P 500 stabilised above the 2,880 points, down 0.23% on the session, while in the Europe EuroSTOXX 50 futures edged down 0.29% to 3,391 points. It is worth noting that the Swiss Market Index (SMI) reached an all-time high yesterday as it hit 9,871.44. Thanks to the solid performances from Nestlé, Novartis and Roche who helped to lift the index by 437, 310 and 230 points, respectively, since the beginning of the year. If one man should be thanked for the last rally it is the ECB President. Indeed, Mario Draghi took a dovish turn at the last meeting, as it left the door wide open for further monetary easing. Indeed, the governing council discussed the possibility of restarting QE and cutting rates.

Recently, the Federal Reserve has also turn to the dovish side and showed concerns about the economic growth and the negative effects of the ongoing trade war. According to the OIS market, investors are now pricing at least two rate cuts before the end of the year. In our opinion, this prediction is a bit too adventurous, as we believe the Fed will use its last bullet cautiously.

Today, all eyes are on the inflation that are due for release at GMT 12:30. Headline inflation is expected to have eased to 1.9%y/y in May, while the Fed’s favourite gauge of inflation, the core measure, should print flat at 2.1%y/y. Both the equity and bond markets are pricing a rate cut in the near future, meaning that the risk is skewed to the upside on today inflation report. Indeed, higher inflation readings could trigger a sell-off, as market participants would discount a dovish move from the Fed in the near term. On the other hand, significantly weaker inflation readings, especially for the core measure, would fuel the current rally. Overall, even though we believe the market is misreading the Fed intentions by anticipating several rate cuts in the near future, we believe that the Fed would ease further monetary conditions in the second part of the summer at the earliest.