Global Economic Momentum
- US Data: Expectation of PCE data (headline and core both at 2.6%). Stability in PCE could prompt rate cuts if month-on-month figures stay at or below 0.2%.
- Germany: Awaiting IFO print, with hopes for sentiment stabilization post weak PMI.
- Spain: Upcoming CPI to offer insights ahead of Eurozone inflation data.
Central Bank Meetings
- Bank of England: Held rates at 5.25% amidst internal splits, hinting at possible rate cuts in August.
- Swiss National Bank: Cut rates to 1.25%, linking to downside inflation risks and suggesting more cuts could follow.
- Norway and Brazil: Both held rates unchanged; Norway until end of 2024, Brazil at 10.25%.
Political Calendar Insights
- Emerging Markets: Goldilocks & the 3 Elections:** South Africa’s ANC too cold, Mexico’s incumbent vote too hot, India’s Modi just right?
- Europe: Watching closely for left shifts, particularly UK's and France's impending elections.
- US Presidential Debate: The first debate between Donald Trump and Joe Biden next Thursday poses potential market volatility.
Transcript
Matt Jones
Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.
My name is Matt, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. It's great to have you here with us again.
Neil Staines
Thank you very much Matt. It's great to be here.
Matt Jones
So diving right in the global macroeconomic configuration remains very complicated at the moment with lots of moving parts. How are we thinking about the global economic momentum at the moment and what are we looking out for next week?
Neil Staines
Yeah. Thanks very much, Matt. Great question. The global macro focus certainly evolved over the last couple of months between the emphasis on growth and inflation. Policy globally is largely restrictive and inflation continues to decline, as supply and demand rebalance after the consecutive shocks that we saw from the COVID issues. But growth is starting to become the real driver of sentiment of monetary policy reaction functions, and therefore of positioning. Now, the most acute focus having the biggest ramifications comes from the US and next week we do see some data in the form of the PCE and we're expecting headline at 2.6% and the court 2.6% also, however we do know the component parts and therefore those numbers shouldn't bring a great shock.
Shouldn't be much of a surprise. Importantly, however, the month on month breakdown of those figures, coming in an unchanged on the headline and just 0.1 on core. Now we pointed out this year that actually if we maintain a level of 0.2 month on month throughout the rest of this year, then that PCE level stays broadly unchanged, and that should be sufficient for the Fed to begin its process of cutting policy rates.
If it were to tick up to 0.3, then we'd start to see the year on year comparison, edging higher because of the comparison with the second half of 2023, and that is really the area of concern of the fed that is really where they need to see confidence in order to begin the cutting cycle. So a very positive start if, as we expect, on Friday, that month on month figure comes in at just 0.1. More globally, in Germany, we see the IFO print at the start of next week, and certainly after a weaker PMI, we're going to be hoping for something to bring about some stabilization of sentiment towards Europe at the moment. In Canada, we also get a CPI print and that'll be very important for us to gauge not just the pace of Bank of Canada cuts, but also the extent to which the Bank of Canada are willing to diverge from US policy before they catch up. Towards the end of the week, we also see Spanish CPI and that should give us an indicator or a heads up ahead of the next print for the Eurozone as a whole.
Matt Jones
Now we've had a broad array of global central bank meetings of late. How has this altered the broader policy narrative, and what impact will this have on next week?
Neil Staines
Yeah. We've had a number of central bank meetings this week. Importantly, the Bank of England unchanged at 5.25. With a seven two split, dhingra and Ramsden, continuing to vote for an immediate rate cuts. Perhaps more interestingly though, from our perspective was the split among those remaining in the unchanged camp, those seven members. They are split between the impact and the influence of the minimum wage hike on the inflation trajectory and actually what underlies that services inflation, persistence. One campus suggesting that it may be more driven by technical factors. Such as index linked, and regulated or annually adjusted factors in the services side and that would certainly give a much more dovish tilt. The key quote for us, "for some", the decision not to cut was finally balanced and if that "some" means three, then we already have a majority in favor of a rate cut should they be so convinced by the August meeting. August meeting, certainly a live meeting for us.
And until that point we're not going to see any commentary really from the bank of England is now enter a blackout period. Ahead of the UK election. We also got rate cut from the Swiss national bank down to 1.25, and they reduced their inflation forecasts. And also changed their rationale for the rate cut this time round, linking it further to downside inflation risks, rather than a currency profile as was the case in May. In fact central bank, Governor Jordan also referenced the fact that the neutral rate is probably at, or around zero, giving them further room to cut should they see fit. Norway rates were left unchanged and they said they see that the policy is likely to remain unchanged to the end of 24 as it remains sufficiently high to bring down inflation, so slightly more at the hawkish end, and Brazil also left rates unchanged at 10 and a quarter. This week, next week we see the Riksbank likely being unchanged. CPI has come down slower than they would've liked, but growth is weak so there's still a risk that we can see further moves to the downside from the Riksbank.
Matt Jones
So that leaves politics. How are we looking at a very complex political calendar across Europe over the next couple of weeks?
Neil Staines
Yeah, it certainly is. Certainly is very complex across Europe. Now, I think it's interesting to view this in the context of the recent emerging market elections that we've had over recent weeks.
So that's India, Mexico, and South Africa, and in some ways you could argue a it's a bit of a Goldilocks and the three bears situation.
In South Africa, the ANCs vote was a little too cold. In Mexico, the incumbent's vote was a little too hot and in India Modi's vote was eventually, and finally just about enough. Although the reactions for markets throughout those highlighted an aversion or a concern about a surge in fiscal deficit.
So that shift to the left that we saw in Mexico, it was certainly something. That concerned markets about the prospect for a fiscal expansion and what that means for the bond market. So that's some message that we're going to take going forward into the European elections, across currencies, bonds and equities that we've faced being punished by fiscal imprudence or the threat of. So the shift to the left in the UK and France will be watched very closely for any market reaction there. The French round one comes next Sunday and in the UK. It's the last week, this week before voting next week.
So I'm sure are we going to see a lot of political headlines and that day of voting in the UK is also a US holiday, so that may bring about slightly more volatility in financial markets. And don't forget actually next week on Thursday, we see the first. Debate us presidential debate between Donald Trump. And Joe Biden.
So it's a huge week for politics. A tricky week for central bank policy and a complex week for macro markets.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next week.
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