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Mirror, mirror on the wall who’s the most dovish of them all?

Financial markets appear to be adopting a glass half full attitude to events after US markets posted their fourth straight day of gains, on optimism that any Mexican tariffs, which are still due to start on , Monday, may well not last too long.

Optimism over progress on taking steps to curb migrant flows at the US’s southern border has risen after US vice president Mike Pence said he was encouraged by the talks. As a result US stocks look set to post their first positive week since April, though some of these gains can also be attributed to much more dovish expectations over the direction of US interest rates.

It’s also set to be a good week for European stocks, over similar expectations of looser monetary policy from central banks across the world, which has seen European markets open higher this morning, with the DAX on course for its best week since March.

Yesterday’s European Central Bank meeting was significant by virtue of the contradictions between its forecasts when set against its guidance expectations. The bank raised its short term inflation and GDP forecasts modestly while also pushing out its guidance expectations of low rates into the middle of 2020. This could be construed as moderately hawkish given that the bank also outlined the framework of its upcoming TLTRO lending program, while stating that risks remained firmly towards the downside. Yesterday’s upgrade was also in contrast to this morning’s Bundesbank GDP downgrade for the German economy.

This  ambiguity merely serves to highlight the bind the ECB finds itself in, notwithstanding the fact that President Draghi won’t be around to deliver on a sequel to his “whatever it takes” speech of June 2012. This may also help explain why the euro finished the day modestly higher as investors perceive that the ECB doesn’t have sufficient tools to ease policy much more.

In a week that has seen the US Federal Reserve rule out the prospect of further rate hikes this year it would appear that the recent cycle of central banks pushing rates higher is now firmly behind us, and as such investors are now pushing money back into bonds, thus sending yields lower.

In that context today’s US payrolls report could well give added impetus behind a Fed rate cut this year, which has already seen US bond markets price in the prospect of two rate cuts by year end. This week’s ADP employment report for May surprised sharply to the downside, coming in at 27k, well below expectations of 185k. This has raised some concerns that the US labour market may well be running out of steam, however it is also important to stress that the low figure could also be a symptom of a tightening labour market.

Furthermore we saw earlier this year that these types of low numbers can be outliers when the headline non-farm payrolls number also saw a sharp slowdown in February with 33k new jobs, before rebounding to 304k in March. For now there appears little reason to be concerned as long as wages growth stays above 3% and inflation pressures remain subdued, which if sustained might suggest that this week’s bond market rally may well be overdone.

Even so, there does appear to have been a significant shift this week in respect of how markets view the next moves for global central banks, with expectations now moving towards who will be the first to blink when it comes to easing policy and ending the recent tightening bias.

It looks set to be another negative week for the pound against the euro, five in a row now, as Theresa May gets set to step down as Conservative party leader. Early indications appear to suggest that Boris Johnson could well get the nod as MPs look to whittle down the prospective candidates to a final two to put to Conservative party members.

Oil prices have also rebounded in line with equity markets on optimism over a breakthrough on US, Mexico discussions over immigration talks, though they still remain much lower than they were at the end of last month. This has helped push up oil and gas stocks with BP and Royal Dutch Shell outperforming.

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