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Five Things

Initial jobless claims due, Trump eyes bipartisan stimulus plan, and a slew of central bank action. 

Employment situation  

This morning's initial jobless claims data at 8:30 a.m. Eastern Time is expected to show little improvement from the previous 884,000 total. Continuing claims are forecast to remain around 13 million, as signs grow that the early rapid recovery in the U.S. economy has slowed. Fed Chair Jerome Powell hit on this theme in his press conference yesterday, saying that "the path ahead remains highly uncertain" while he and Fed officials stressed the likely need for further fiscal stimulus.


There are some indications that there may be progress on agreeing that fiscal stimulus after months of negotiations failed to produce any breakthrough. President Donald Trump said yesterday that he is open to the extra spending contained in a compromise $1.5 trillion proposal from a bipartisan group of House lawmakers. The president's comments were welcomed by House Speaker Nancy Pelosi who had previously called the package insufficient. The bigger struggle might be to win over Republican lawmakers, with many already expressing opposition to the larger package. 


While reaction to yesterday's Fed decision remains the main factor driving markets today, there is plenty of other central bank action to keep an eye on. The Bank of Japan held interest rate and asset purchase policy unchanged, while upgrading its domestic growth forecast. While the Bank of England's decision at 7:00 a.m. is also unlikely to hold any major surprises, investors will look for any signs officials are laying the groundwork for future monetary stimulus. The central banks of Indonesia and Taiwan also held rates unchanged in decisions earlier. The European Central Bank offered more capital relief to commercial banks to help maintain the flow of credit to the virus-struck economy. 

Markets slip 

Global equity investors are taking some risk off the table as they react to Powell's comments on the uncertainty over the economic outlook. Overnight, the MSCI Asia Pacific Index slipped 0.8% while Japan's Topix index closed down 0.4%. In Europe, the Stoxx 600 Index was trading 0.7% lower at 5:50 a.m. with banks and miners leading the losses in a broad-based selloff. S&P 500 futures pointed to plenty of red at the open, the 10-year Treasury yield was at 0.684% and gold slipped. 

Coming up...

As well as claims data, U.S. housing starts for August and the September Philadelphia Fed Business Outlook are at 8:30 a.m. An OPEC and its allies committee meets today to discuss if the group's cuts are enough to stave off a potential crude glut. President Trump is expected to get a briefing on the Oracle-TikTok deal. White House economic adviser Larry Kudlow speaks to the Economic Club of New York. 

What we've been reading

This is what's caught our eye over the last 24 hours.

And finally, here's what Lorcan's interested in this morning

In the last decade and a bit, central bank balance sheets have expanded massively -- along with shrill warnings on runaway inflation. The argument in the extremis generally runs something along the lines: Printing cash can cause Weimar hyperinflation. 

There are a couple of obvious problems with that. Firstly, there has been no uncontrolled inflation. Secondly, central banks aren't actually physically printing the money for asset purchases.

But, there is something interesting going on in euro area when it comes to the cash the European Central Bank is really printing. It has no control over the amount of euro currency in circulation, that is purely a function of demand from banks -- in turn caused by consumer demand. It might seem logical that an increase in consumer cash needs might be inflationary, as people need more cash to spend it. 

However, from the chart below we can see that almost the exact opposite is the case. 

The green line is annual growth in cash in circulation, a weekly data series produced by the ECB. The red line is euro-area HICP inflation. There is a clear spike in cash in circulation in 2008, just as the Great Financial Crisis was gaining steam. That spike in cash foreshadowed a very rapid DROP in inflation over the subsequent 18 months. And the recovery in inflation was accompanied by a reduction in the growth rate for cash demand. 

There was a similar, if less pronounced, episode in 2014-2015. If you then shift forward to 2020, you can see a move that echoes the 2008 spike in cash demand and plunge in inflation. 

Source: ECB, Bloomberg

Source: ECB, Bloomberg

So, the data -- for the euro area anyway -- clearly shows that actual, accelerated money printing by the central bank is followed immediately by a slowdown in inflation. Which is possibly not an argument you have heard before. 

Usefully, the ECB publish cash in circulation numbers every Tuesday for the previous week, so it may be something worth keeping an eye on for anyone looking for a high-frequency indicator of disinflationary risks. 

Follow Bloomberg's Lorcan Roche Kelly on Twitter at @LorcanRK

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