Adding to the unusual times US core CPI figures (Aug) yesterday rose to highest level since September 2008 creating a difficult environment for the Fed. However, keep in mind that the Fed’s preferred CPI measure remains still well below 2%. But if inflation is showing its face while the USD is historically strong then the Fed will have to make difficult choice. Should hold rates due to domestic economic situation and risking a strong USD killing global growth? Or does it cut rates to ease financial conditions and help the global economy, but risking accelerating inflation with all its consequences? This conundrum is also highlighted in today’s FX Update.
Did Draghi deliver enough for banks?
Setting intraday volatility yesterday aside price action this morning suggests investors are happy with the two-tier system to alleviate the pain for banks due to negative rates. As we highlighted in yesterday’s equity update the lesson from Japan is that the rally continue as investors are slow at repricing the effects of the tiering system. But the lesson learned is also that the tiering system does not change structural issues that European banks face with too high operating costs, poor technology infrastructure, low loan demand, excess customer deposits and negative rates on government bonds. Structurally we remain negative on European banks despite our short-term optimism driven by the ECB decision and the steepening of the euro swap curve.