In this episode:
- Central Banks Respond to Shifting Economic Condition
- UK's Economic Challenges in the Spotlight
- All Eyes on the Fed and US Economic Signals
Central Banks Respond to Shifting Economic Conditions
- Diverging Strategies: Central banks across developed markets displayed varied approaches, from rate cuts in Canada and Switzerland to stability in Australia, influenced by inflation and unemployment trends.
- A Hawkish ECB Interpretation?: Despite reducing rates and lowering growth forecasts, the ECB hinted at a more balanced inflation risk profile than current market expectations.
- Emerging Market Moves: Brazil's aggressive 100-basis-point rate hike reflects rising growth and inflation challenges.
UK's Economic Challenges in the Spotlight
- Sluggish Growth: October's GDP data confirmed continued economic softness, underscoring persistent post-budget challenges.
- Key Data to Watch: Upcoming employment, CPI, and retail sales data will test the Bank of England's outlook and reaction to inflation remaining above target.
- Rate Cut Expectations: We anticipate steeper rate cuts in 2025 than current market consensus amid ongoing demand weakness.
All Eyes on the Fed and US Economic Signals
- Anticipated Rate Cuts: The Fed is expected to announce a 25-basis-point cut, with markets focusing on future guidance and updated projections.
- Disinflation Trends: Continued signs of growth moderation and disinflation in 2025 could benefit risk assets and bonds while weakening the dollar.
- Powell's Press Conference: The tone and insights on inflation and growth trajectories will shape market volatility into year-end.
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
It's been another busy week in markets, with a number of central banks in action, notably the ECB. How are we reflecting on the developed market monetary policy activity?
Neil Staines
Yeah, great question, Matt. This week has been the first of two very busy central bank weeks in developed markets. And that's not to mention the Emerging markets where notably the Brazilian COPOM raise the Selic 100 basis points and suggested that they would do the same in the next two policy meetings as growth and inflation continue to rise more than expected.
However, in the DM space, first up was the RBA, the Reserve Bank of Australia. Rates were left unchanged at 4.35%. However, they suggested that they are gaining confidence that inflation pressures are declining and the inflation is returning towards target. Conditions have weighed on household discretionary spending and therefore markets have gained confidence that the RBA could start easing, perhaps even as early as February 2025.
An unexpected drop in the unemployment rate this week, however, has countered some of that sentiment and highlights the complexity of the gross inflation trade off in Australia. In the Canada, the Bank of Canada cut 50 basis points and that's 175 basis points of cuts since June.
However, the Bank of Canada did intimate that the pace of cuts is likely to slow from here on in. The main driver there being the rise in the unemployment rate, something like two percentage points over that period, with inflation already back to target. Inflation bit more of a problem in Switzerland as the Swiss National Bank also cut 50 basis points to a half a percent and gave updated projections that show that inflation at just 0.3 percent year on year in 2025 leaving open the prospect for negative inflation and even negative interest rates next year in Switzerland. However, in the DM space this week, it was all about the ECB. The ECB cut rates 25 basis points and removed reference from the statement suggesting that rates needed to be sufficiently restrictive in order to get inflation back to target, suggesting now that on most measures they see inflation trending sustainably back to the 2 percent target over time.
The governing council lowered its growth and inflation forecasts, but the new 2027 forecast sees inflation at 2.1 percent at the forecast horizon now conditioned on market rates, that gives us slightly more hawkish interpretation given that we're above target at that point. While the growth and inflation forecasts were revised lower, they're probably not as low as the median market expectation and overall, therefore, consistent with rates lower in the Eurozone, but likely not consistent with a more acute or extrapolated negative Eurozone view as we have warned of on previous occasions, both here and in the blog.
Indeed, the ECB president warned that the balance of risks to growth remained weighted to the downside, and that in itself acutely focused on the potential implementation of tariffs that affect European trade, but that the balance of risks to inflation remained two way.
And in many respects, the market took this as a bit of a pushback to some of its aggressive rate cut pricing although there remains a significant risk premium in the January meeting just after the inauguration event in the US.
Matt Jones
Now, with disappointing growth data for the UK at the end of this week, And the Bank of England next week. How are we thinking about the UK?
Neil Staines
Yeah, it's a good point, Matt. Very disappointing growth figures at the back end of this week. The October GDP print came in down 0.1 percent month on month, as expected, slightly positive.
And that continues a run of lacklustre data and sentiment since the recent budget. Next week is a big week for UK data. We get the employment report for October on Tuesday. The unemployment rate is expected to remain unchanged at 4.3 percent there, but there's going to be a bit of a focus on the potential uptick in wages that is expected there.
The CPI print for November comes on Wednesday. Headline rising to 2.6 percent expected from 2.3 and the core 3.7 from 3.3. So significantly above Bank of England targets there, but will be very key to monitor the Bank of England's reaction function.
And then on Friday we get retail sales for November. Black Friday sales have impacted broader sentiment and some read through there for the domestic demand trajectory. Sandwiched in the middle of that, we get the Bank of England. However, with no press conference, no monetary policy report and no change expected, it's likely to be something of a non event.
However, we continue to see demand weakness driving lower growth and inflation in 2025. And therefore a steeper pace of rate cuts than the market is currently priced. Only 77 basis points priced by the November 2025 meeting, but it remains a complicated backdrop for the UK economy and for the Bank of England.
Matt Jones
The US has often had the last word throughout the year, and I suspect it'll be the US that has the last word in 2024. What are the key focal points in the US next week?
Neil Staines
Yeah, absolutely right. That US is going to be a huge focus for next week. However, there's also going to be one central bank that we've missed out so far, and that's the Bank of Japan. Very mixed commentary recently, and interestingly, as the flow of analysts calls for a 25 basis point hike in December have grown in confidence, the market pricing of a rate hike has lost confidence falling from 17 basis points at the start of the month to just four basis points. Now, recent inflation, wage data, and even the Tankan report at the end of this week are supportive of a rate hike in Japan. Very clear rationale for a significantly higher policy rate through 2025.
However, the timing of the next hike is less clear, but a big focus on early Thursday morning of next week. However, you suspect correctly in that the US is certainly going to be the big focus of next week. A 25 basis point cut is near unanimously expected by analysts and markets alike.
The current pricing being around 24.2 basis points. We've had non farm payroll data recently with the unemployment rate back up very close to this year's highs. The CPI print came in pretty much in line, although with some encouraging signs from both services and housing data, something we touch on a little bit more in this week's blog.
And we get retail sales data on Tuesday ahead of the Fed on Wednesday for any last minute adjustments, though, we suspect that the Fed will be very clear in their actions on Wednesday evening. The focus will not so much be on what they do, but what they say. And there'll be a big focus on the Powell press conference.
The emphasis will be on the interpretation of recent data and any changes to confidence around the inflation and growth trajectories. We do get updated SEPs and dots and therefore we get greater insight into the Fed median views for growth in inflation and the policy reaction function that goes alongside that.
Ultimately, the guidance for the cadence of rate cuts next year will be the key focal point for markets. With just over two 25 basis point rate cuts priced into the markets for 2025, there's a little bit of variability and potentially therefore a little bit of volatility left in this market for the rest of this year.
We still see continued disinflation and growth moderation in 2025 and that being positive for risk but also likely positive for bonds and negative for the dollar. Next week's Fed takes an acute policy focus right to the end of 2024 but also a look through into 2025.
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 time.
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