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The S&P 500 closed out at a new record high yesterday as the market shrugged off the Alphabet earnings miss and instead chose to focus on the positives – namely a dovish Fed, apparent progress on China trade talks and a humming US economy. Aside from Alphabet the earnings season so far has been a positive surprise.

Apple earnings after the bell were upbeat (see earlier note), whilst a softer dollar was a tailwind. Dow industrials enjoyed positive earnings from Merck, Pfizer and McDonalds. GE also delivered an earnings beat. The Nasdaq finished lower as the Alphabet earnings disappointment weighed. Apple should deliver a boost to the index today. 

The euro is trading at a one-week high against the dollar, whilst cable has also sought to raise its head above the 1.30 mark again. We should be careful about reading the rites on the dollar rally thought – month end rebalancing has been pinned on some of yesterday’s losses for USD.  

Nevertheless, there was some boost as EZ GDP data printed higher than expected and German CPI was also on the upside. German inflation rose to 2% year on year, after leaping 1% month on month in April. I would still caution that other macro data are pointing to ongoing weakness. Leading indicators don’t look so clever with PMI data indicating a slowdown in Q2.   

Euro at week highs

As far as EURUSD goes, Friday’s indecisive candle was an indicator of a short-term rally but the longer-term trend remains to the downside. Trend resistance is coming in around the 1.12650, with April highs horizontal resistance beyond at 1.1320. This suggests we could get a little more upside in the near term before the rally hits a roadblock. EUUSD was last holding above the 1.1210 level. Expect thinner liquidity today as it’s the May Day holiday on the continent with the major European bourses shut.  

FOMC on tap

Coming up later today of course is the FOMC decision. Don’t expect the Fed to tie its hands to anything conclusive right now – there are just too many moving parts and policymakers are split over where they think the economy is heading. I would expect that the Fed retains its slight hiking bias – discussions around the possibility of cuts may take place but the Fed should stick to its patient, data dependent mantra. Declining two-year yields and stable 10-yrs has produced a mild steepening in the yield curve, which may show greater market confidence in the economy and a sign that perhaps the much-talked-about recession is not about to hit.

Markets are still underestimating likelihood of a hike this year –  Currently the market indicates a 65% chance of a cut this year and zero chance of a hike. Whether that would be a mistake or not it not the point. Policymakers will have to acknowledge the impressive Q1 GDP print, as well as booming consumer spending. Softer inflation and earnings numbers mean there is no pressure to raise rates though. Of course, Trump will keep his foot on Powell’s throat and continue to jawbone in favour of cuts. The big question vis-a-vis this meeting and the market response is whether Powell chooses to sound dovish or hawkish in the press conference. Evens. Powell doesn’t have to do anything this time.”

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