In this week's Podcast
- ECB Rate Cut Path: Data-Dependent Yet Hawkish (relative to Fed pricing)
- UK Focus: CPI and Bank of England Decision Loom
- Fed Watch: Focus on Rate Cuts and Communication
ECB Rate Cut Path: Data-Dependent Yet Hawkish (relative to Fed pricing)
- ECB cut rates by 25 bps, emphasizing data dependency for future decisions.
- Services inflation remains a concern, keeping the ECB's tone relatively hawkish.
- Global data next week, including China and Eurozone CPI, will be pivotal in guiding market expectations.
UK Focus: CPI and Bank of England Decision Loom
- August CPI print will be critical in shaping BoE's next steps on rate cuts.
- Markets price in only a 16% chance of a 25 bps cut, but downside CPI surprises could prompt action.
- Retail sales remain fragile, with further declines possibly impacting monetary policy expectations.
Fed Watch: Focus on Rate Cuts and Communication
- Fed decision teeters between (dovish) 25 and (calming) 50 bps rate cuts.
- Retail sales and consumer credit trends suggest downside risks to domestic demand.
- Markets will scrutinize the FOMC’s communication, particularly economic projections and unemployment rate forecasts.
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 the ECB has been a big focus this week. How are we reflecting on that, and what are the implications of the ECB actions on markets next week?
Neil Staines
Yeah. Great question, Matt. As you say, the ECB were a big focus this week where they lowered the deposit rates by 25 basis points to three and a half percent. That was very much as expected. Also as expected, they gave no forward guidance on the rate path. And suggested that the ECB will remain data dependent going forward in terms of rate cut progression. We highlight some of our thoughts on this and discuss the interaction between ECP and fed policy for market sentiment and positioning this week. However, ultimately the ECB narrative, and by extension market pricing, still highlights are relatively slow and careful rate cut path from the ECB.
Outside of the fact that they left an October cut on the table. The balance of the statement. Remained relatively hawkish despite the fact that they continue to highlight that the balance of risks to growth remains to the downside, the issue it remains that services inflation still remains elevated driven by continued tightness in the labor markets. Now, next week, we also get a German ZEW, we get Eurozone CPI, that's the August print, so both of those are going to be relevant for the growth and inflation narrative within the Eurozone, but more broadly, we also get the China's suite of data on Monday, Aussie employment on Thursday, and Japanese CPI on Friday that give us a broader flavor, or a broader gauge, of the global growth and monetary policy trajectory, all important to wrap that up into this week's ECB and projections for the path of rates go forward.
Matt Jones
And with the bank of England back on the radar next week, what are we looking out for in the UK? And what are we expecting from the MPC next week?
Neil Staines
Yeah, quite right. The, the macro emphasis in financial markets he has been very much elsewhere for what seems like a long while. In global markets, but we're back on the UK this week. Politics and news flow in the UK has recently been more domestic politics and global geopolitics, but next week, we're very much focused on monetary policy.
We get the August CPI print on Wednesday. We're expecting the headline rate to come in at 2.2% unchanged from the previous month and energy base effects to drive the core rate up to three and a half. But growth appears to be increasingly a cap on demand driven price pressures, and any disappointment in the July CPI this week is likely to see a greater emphasis on rate cut expectations in the UK. Retail sales on Friday after a long slow move back into positive territory on an annual basis for the retail sales trajectory, risks slightly increasingly to the downside. Over the next couple of months, the big event next week though, is the bank of England.
Market is pricing just a 16% probability of a 25 basis point cut next week, but for us that any downside surprise on the CPI print this week could see the bank of England cut outside of an MPR month. That next MPR month or monetary policy report month coming in November. As the cycle progresses, we still do not rule out bigger increments from the bank of England going forward.
But perhaps in terms of policy activism, A quieter one from the bank of England.
Matt Jones
And finally, of course we have the potentially dominant focus for next week of the US. And US rate to pricing. What are we focused on?
Neil Staines
Absolutely. Yeah. Thanks, Matt. Articles from the Ft and the wall street journal. As we end this week, have highlighted the case for 50 basis point rate cuts from the Fed.
With Fed funds, market's now pricing almost exactly in the middle between a 50 and a 25 basis point cuts.
The next week promises to be very interesting and is likely to keep that baseline volatility elevated. Ahead of the FOMC on Tuesday, we get retail sales last time out for the July data, we saw a bit of a bounce. However, subsequently we have found out that that coincides with a significant jump in consumer credit.
So that's a relationship is unlikely to be sustainable and suggest perhaps there are some downside risks to retail sales growth overcoming months. Any signs of a deterioration in domestic demand could certainly sway markets and the Fed more towards a 50. But ultimately there are a number of focal points, not just the ultimate rate cuts decision. Alongside the decision markets are going to be very keenly focused on the communication that comes with that. Is it a 25? With some dovish rhetoric, is it a 50 with a more calming rhetoric?
So an intense focus on the words, in the statement and the press conference are inevitable. We get the dots, so the expected rate to cut path from the individual members of the FOMC voting members and non-voting members alike.
And we also get the updated summary economic projections, and that's going to be significant in that we will get estimates of the path or progression of the economic indicators as well. Particularly a focal point there will be the unemployment rates, projections in the SEPs. After what we saw at the back end of last week, a much weaker trajectory from nonfarm payrolls, so all very interesting, but very much as you say, a huge focus on the FOMC for financial markets next week and likely to come with continued elevated baseline volatility for financial 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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