In this episode:
UK Macro Backdrop: Navigating Fiscal and Monetary Challenges
- The UK is experiencing a fiscal tightening atmosphere at the consumer level despite broader fiscal expansions.
- Upcoming data releases (CPI, GDP, and retail sales) will shape the Bank of England's monetary policy outlook, with potential implications for interest rate adjustments.
- Persistent gilt market volatility reflects heightened concerns over UK public finances and adherence to fiscal rules.
Global Economy: Europe and China's Key Dynamics
- Europe faces structural challenges, including Germany's industrial model adjustments and fiscal debates in France and Germany.
- Peripheral Eurozone economies (Portugal, Italy, Greece, and Spain) are outperforming due to tourism recovery and reduced sensitivity to China.
- China's Q4 data will provide insights into the effectiveness of fiscal stimulus measures, particularly in stimulating consumer demand and addressing trade tensions with the U.S.
U.S. Economic Outlook: Growth and Inflation in Focus
- Critical data releases, including CPI and retail sales, will inform expectations of continued disinflation and growth moderation.
- Fiscal and inflation expectations under potential Trump 2.0 policies are likely more uncertain, with risks being more two-sided than current consensus expectations.
- The beginning of Q4 earnings season, particularly from banks, will add another layer of complexity to U.S. market sentiment.
Transcript (AI Generated)
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 a volatile start to the year in UK markets, and we have a big week for data and markets next week. So how are we thinking about the complex UK macro backdrop at the moment?
Neil Staines
Yeah, it's a great question, Matt. Good way to start the year. We touch on this topic a little bit more in this week's blog and essentially amid a broader or more global sell off in bond markets, the Gilt market has attracted the attention of bond vigilantes this week. Now we've spoken over recent months about our view that the October fiscal event in the UK was technically a fiscal expansion, but would very likely feel like a fiscal tightening at the consumer level in short higher debt, but lower growth. And this has emerged as a core fear in Gilt markets this week. Indeed global bond selling is exacerbated the move to the point that the debt cost associated with the budget has risen to the extent that the fiscal rules breaks the Chancellor's fiscal rules in that debt must be falling by the end of the parliamentary term. So a complex backdrop for UK public finances and for the pound has enveloped markets this week and we expect that stress to continue into next week. Next week we have CPI on [00:02:00] Wednesday. Some base effects are at play in the UK at the moment, though the headline expected to tick up, but the core measure more critical to the Bank of England reaction function is likely to tick lower. GDP on Thursday, that's for the month of November, and retail sales on Friday for the month of December. Now, overall, we continue to see a negative growth trajectory giving the Bank of England further confidence in the inflation and growth potential. trajectories such that rates can come down faster than is currently priced by the markets, especially if the government is forced into fiscal tightening that may spur a little bit more monetary loosening. But either way, it's going to be a very interesting week for the UK on a big focus for global financial markets next week.
Matt Jones
Looking more broadly, what are we looking out for in the global economy starting 2025?
Neil Staines
Yeah. Again, thanks, Matt. It's a very important question. Outside of the UK and outside the US, which I suspect get back to at some point Europe and China from an economic standpoint are the most dominant dynamics for the global macro going into 2025. In Europe there are questions about the post cheap Russian gas facilitated industrial model, especially in Germany. And that's going to be key. There are fiscal question marks the extent of loosening that we're likely to see in Germany and the extent or credibility of the tightening that we're likely to see in the budget in France. They both remain very important questions and the role of fiscal in the political debate ahead of February elections in Germany is likely to be very significant on that front. In Europe, we also get the continued debate around the core versus periphery growth dynamics. We're currently seeing significant outperformance in those countries that were the weaker countries during the Eurozone crisis Portugal. Italy, Greece and Spain, all outperforming likely on improved tourism on a lower sensitivity to China. Now on China, the credibility of the fiscal stimulus, in addition to the details still largely remain outstanding, remain key to the trajectory going forward, not to mention the extent the trade tensions between the U S and China under Trump. 2. 0. The impact that this is likely to have on the global growth and risk appetite is going to be a key focus for global markets going forward. China and Europe are going to be a key focus. Next week will not bring answers to those most significant questions, but will give us an insight into the current trajectory. In Europe, we get the ECB minutes and we'll focus on the rates path going forwards. Pretty noncommittal in terms of the incremental moves going forward, but the direction of travel pretty clear. It'll be interesting to see if there's any debate around the more inflationary implications of higher energy prices and also the lower Euro as a function of the rate and growth divergence expectations that we've seen in markets. Markets are now looking to be pretty fully priced from a currency perspective relative to that rate differential movement that we've seen. And it may be a little bit more two way from Europe and from the Euro going forwards. In China, we get the Q4 suite of data. That's industrial production, retail sales, fixed asset investment and the unemployment rate. And that will be key to gauge the success of the early stimulus measures, particularly in the areas of consumer demand on that recovery going forward. And it's all going to be very concentrated as we move into the inauguration on the 20th and what that means for the global growth and global trade trajectories.
Matt Jones
And this is an important point, because obviously looking to the US next week, we've got the last week of the Biden administration, an important week for data, and an important week for sentiment. So what are we focused on in the US next week?
Neil Staines
Absolutely. It's a huge week. As you say, Matt, for the US following on from the employment report for December which is after we published this today. We get the CPI print for December on Wednesday and we get the retail sales print also for December on Thursday and those two in conjunction with each other, very important in terms of their updates on the growth and inflation dynamics. We still expect this data to be consistent with continued disinflation and growth moderation. And it continues to be a huge focus for markets. However, as we discussed further in this week's blog, The US and global sentiment indeed is currently dominated by expectations of policy evolution under Trump 2.0. We expect the fiscal and thus growth and inflation risks are more two way than current market consensus, and we also get the start of Q4 earning season next week with the banks kicking off from Wednesday. So all in all, it's another very complex week, but a fascinating week for global 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 time.
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