With economic data seemingly improving month on month, and inflation being kept in check, there is little to really stop this stock rally in its tracks. Despite the Federal Reserve's well-publicized and much-hated massive dollar creation, money supply actually fell in August.
Thus the Fed still has much room to keep rates ultra-low, which the Federal Open Market Committee will likely do at tomorrow's meeting.
Regardless of what many may fear, deflation, not inflation, remains the key danger to the US economy. Should the nascent US recovery sputter, this will become even more the case.
Continuing steepening along the Euribor curve seems to be the trade as bets for rate increases now are priced to occur in mid to late 2010. Front month spreads are creeping higher, and red month spreads are also increasing.
The technical outlook for the Bund is beginning to appear more bearish, the double top formation at 121.74 has held and the market has broken below monthly lows. Significantly the Bund broke and closed below a daily uptrend last Friday (currently at 120.37), and despite breaking back above it yesterday once again closed below. The downward pressure created from this technical break when added to the double top formation could easily lead the Bund down to daily support around 119.70 and then to the bottom of the larger consolidation zone at 118.57.
On the FX front, the US dollar remains weak with the EUR/USD breached 1.48. Cable remains mixed as we await the BoE minutes tomorrow, and in particular how close we were to a commercial deposit rate cut. If we have a close vote between the 9 members, it is likely Cable will be dumped, and a break of 1.60 is on the cards.
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