In this week's Podcast
- Fed's Recalibration and US Economic Outlook
- Global Economic Events and Central Bank Reactions
- Fed Watch: Focus on Rate Cuts and Communication
Fed's Recalibration and US Economic Outlook
- 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.
Global Economic Events and Central Bank Reactions
- Global flash PMI data for September will provide critical insights into global macroeconomic conditions, highlighting any regional divergences.
- The RBA, previously hawkish, is expected to react to the Fed’s dovish surprise, with markets pricing in a potential rate cut by year-end.
- The OECD’s interim economic outlook, the EU’s vote on China EV tariffs, and ECB’s stance (following Lagarde’s Thursday speech) will play key roles in shaping global monetary policy expectations.
Monetary Policy Shifts in Europe and the UK
- The Bank of England’s recent decision to keep rates unchanged, made prior to the Fed’s cut, could lead to a 50 basis point hike in November in response to increased risk premiums.
- Europe may also see an October rate cut from the ECB, further reflecting recalibration influenced by the Fed’s moves.
- Key indicators, such as Germany's IFO data and regional CPI from European states, will shape the evolution of monetary policy expectations across Europe.
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 it's been a big week for financial markets, a surprise 50 basis point rate cut from the Fed, but a relatively muted response from markets. How are we viewing the Fed and what are we looking out for next week?
Neil Staines
Yeah, absolutely. Thanks very much, Matt. We we touch on this a topic in a little bit more detailed in this week's blog. But you're right, essentially it was a surprise 50 basis point cuts.
Although it was going to be a surprise either way as markets had priced pretty much exactly in the middle between a 25 and a 50 basis point increment at the meeting. Now as the Fed formerly expressed its attainment of balanced risks to each side of its mandate. That is price, stability, and maximum employment, with a front-loaded recalibration of us rates, a recalibration really was the buzzword, or the word of the day, as far as the FOMC meeting was concerned as Powell clearly expressed increased confidence in the removal of upside risks to inflation and rising concerns over top side risks to unemployment, and this saw the Fed elect to remove some of the restrictiveness of US rates and hence the term recalibration, rather than choosing to use rate cuts with slightly different connotations. Going forward. The SEPs or the summary of economic projections also highlighted this increase in the path or the projected path of unemployment across the forecast horizon and the downgrades to the inflation projections,; with growth pretty much unchanged around 2% throughout that forecast horizon. Ultimately this implies a backdrop consistent with our long-held macro economic thesis; continued disinflation and growth moderation as the dominant drivers of the U S economy, essentially a soft landing scenario supported by renewed Fed put.
And that has obvious, in many respects connotations for equities duration and indeed the dollar.
Now next week, we get a number of speakers, including Powell on Thursday, although that is a recorded message and therefore no tricky questions to avoid that stage. We get PCE on Friday, the Fed's preferred inflation measure, and we're looking for a headline print of 2.3%, however, the month on month, number of 0.1, six, or perhaps 0.17 is likely to annualize below the 2% target for the Fed, and therefore continued in to point continuing to point to lower inflation. So US policy and growth trajectories continue to be the dominant factor but next week focus may broaden to the global economy. With the global bonds, global equities and currencies alike.
Matt Jones
And on that note, what are we looking out for next week? From the perspective of the global economy?
Neil Staines
Yeah, that's right. So a lot to look out for next week. On Monday, we get the global flash PMI data for September. And that's going to be very important as we gauge, not just the overall trajectory of the global macro economic backdrop, but also any divergencies we see there from particular regions or countries. On Tuesday, we get the RBA. RBA will be very interesting in that they have, until this point been one of the more hawkish of the central banks we'll gauge to see what this kind of dovish surprise from the Fed has in terms of their reaction function. Interestingly at the last meeting in September they actually discussed a rate hike, and so therefore with markets pricing 20 basis points by the year end and a hundred basis points over the course of a year. It'll be interesting to see how dovish the RBA reaction function evolves over coming months.
On Wednesday, we get the OECD, interim economic outlook. And again, that will give us a reference point as to how the OECD view, the global economy and any distribution within that. We also get the EU vote on tariffs on China EVs, so it's not just the US where we can focus on tariffs and on China measures. On Thursday, we get Lagarde, and this may be our first opportunity to react to that dovish surprise from the Fed, so markets will be very keen to to let us listen to any kind of subtle change in tone, particularly towards openness to activity at the October meeting. And then on Friday we get the Japanese LDP leadership election, essentially a defacto prime minister contest in Japan. With the casita stepping down.
Markets will be debating whether or not the new prime minister will have any impact on the monetary policy trajectory in Japan. So we should find that over the weekend. But a big weekend. For global data none the less.
Matt Jones
So after the Fed move, will the emphasis move back towards Europe in the DM central bank space? And how do we see that evolving next week in particular?
Neil Staines
Yeah, great question, Matt. I think, the, a larger than expected Fed move will certainly focus attention on other central banks. The UK who delivered their unchanged result this week on Thursday, the day after the Fed, although it's important to note that decision was made the day before the Fed. Just due to the basis under which the bank of England release the statement and minutes in a non monetary policy report month. The Fed action this week should certainly increase the risk premium towards a 50 basis point move from the UK at the November monetary policy report meeting. And in Europe, the possibility of an October cut as we referenced earlier is certainly likely to increase as a function of the Fed. We also get the IFO next week out of Germany on Tuesday.
Lagarde speaks on Thursday. And we get regional CPI from the European states on Friday. All play a part in the evolution of the recalibration of monetary policy expectations in Europe. And it's another big week for bonds, equities or curves and indeed the dollar.
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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