You can almost taste the chocolate cake

Posted by: Paul Donovan

13 Feb 2019
  • Equity market investors can practically taste the beautiful piece of chocolate cake served on a Mar a Lago plate. Enthusiasm about the prospect of a US-China trade deal led equities to rally. The hope is that not only will there be no new taxes, but some of the existing taxes may be reversed.
  • US labor markets remain strong, with new increases in job openings. Wage growth is running between 3.5% and 4.0%. However, inflation may be reduced through the clever application of quality adjustment. This allows inflation to fall when prices do not change (or even rise), and it will work to lower US inflation this year.
  • UK inflation is also subject to quality adjustment (it is a perfectly respectable thing to do) – although not as much as the US inflation is. However, inflation is not in focus with the Bank of England waiting for the interminably tedious EU exit process. Economists are reduced to analyzing conversations overheard in a bar in Brussels to judge likely political outcomes. Overheard bar conversations suggest a long delay.
  • Eurozone industrial production is due and expected to decline. There is a sense that dodgy data from Germany may be behind part of the weakness.

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