In this episode:
- US, UK, and European Data in Focus
- Japan’s Critical Monetary Policy Moment
- China’s Recovery and US Political Shifts
US, UK, and European Data in Focus
- US inflation data (PPI and CPI) shows signs of easing, but retail sales reveal mixed economic signals.
- The UK faces weaker GDP and retail sales, with improvements to the stubborn services inflation in December potentially enabling easier Monetary Policy.
- Europe shifts back into focus with German ZEW and global PMIs, alongside expectations for fiscal and monetary adjustments in 2025.
Japan’s Critical Monetary Policy Moment
- Positive wage data supports expectations for monetary policy normalization, contrasting trends in other developed markets.
- Market pricing for a rate hike has surged, with the decision likely to have major implications for the Yen, JGBs, and Nikkei.
- The Bank of Japan’s decision hinges on critical CPI data and potential geopolitical surprises.
China’s Recovery and US Political Shifts
- China’s GDP, retail sales, and industrial production data surpass expectations, signalling a potential bottoming out of consumption.
- The inauguration of the new Trump administration highlights shifts in fiscal conservatism, trade policy, and deficit reduction priorities.
- Markets brace for potential surprises, as fiscal expansion and tariff policy dominate early expectations for the new term.
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
So, it's been another complex week for financial markets, as always with many moving parts. So, how are we looking at things from a global macro perspective?
Neil Staines
Yeah, good question, Matt. It's certainly a critical juncture in the global macroeconomy. This week, we've seen inflation prints in the US, both PPI and CPI, showing some signs of easing or a re-easing of price pressures.
Retail sales data from the US have come in on the soft side of expectations at the headline level, but if you strip out some of the weakness that we saw in December in food services and building materials, the control group that constitutes the input into the GDP data was indeed relatively strong.
That in itself has likely pushed up Q4 GDP estimates as a result. One caveat or caution we would like to add to that argument is the front-loading argument of export and trade activity ahead of prospective trade tariffs. We touch on this a little bit more in the blog, but it's certainly some visibility of this front loading activity in Philly Fed new orders, in the US employment report, even certainly in the kind of the trade employment data. China trade surplus and even potentially here in the retail sales data. So something to watch for in terms of that Q4 Q1 GDP comparison and what impact front loading has had there. In the UK, the data has been more clearly weak. With downside surprises to CPI, most notably in the stubborn services, inflation components to 4.4 from 5 percent there, a weaker GDP and weaker retail sales. Again, we touch on this in the blog, this point we have made on many occasions, that the recent budget was a fiscal loosening that will feel very much like a tightening of the consumer level is certainly starting to play out across consumer and labor markets.
And then in China, lastly this week. We also saw the suite of data showing GDP, retail sales, industrial production, all better than expected in an encouraging sign a bottom may have been reached in Chinese consumption. Next week is a very light week for US data as politics takes center stage. We get German ZEW and global flash PMIs along with Lagarde speaking live from Davos next week at the World Economic Forum.
So Europe is going to come back into focus as we think about the bottoming out of that European trajectory, and what the prospects are for both growth and inflation going forward. And particularly as we approach the German elections where many participants will be hoping for a pickup in the fiscal backdrop in Germany.
We get UK employment next week and I'm sure a raft of Bank of England speakers from Davos. So that monetary policy evolution for 2025, a very important driver of sentiment and positioning across global markets. It's not clear to us, however, that current consensus expectations will materialize.
Matt Jones
Now, to pick up on a point that we've discussed both on the podcast but also in the blog over recent weeks is Japan. So it's a big week for Japan next week. How are we looking at the Bank of Japan meeting and the implications of this much awaited decision?
Neil Staines
Yeah, it's a great point, Matt. You know, it's a huge week for Japan. Over recent weeks, as you say, we have discussed the importance of the wage data, positive real wages, on the prospects of this monetary policy normalization, notably in the opposite direction to the rest of the developed markets.
Now, this week, following the scheduled cash earnings data that we referenced last week in the blog Deputy Governor Gimeno gave some interesting testimony, suggesting that its certainty is rising gradually for the outlook to be met, and that recent information on wages have been positive. Alongside the commentary that it's impossible to have the market fully pricing in the meeting result, it's interesting to note that the pricing for the meeting next Friday has gone from 10 basis points on January the 9th, to around 23 basis points, or almost fully priced for that rate hike expectation at the back end of next week.
This has been further enhanced by Bank of Japan comments suggesting that they see good chance of a January rate hike. And the CPI data released hours before the decision will mean that it's a very big week for the Bank of Japan a big week for the Yen, JGBs, and the Nikkei. And one point further to add as far as Japan is concerned, the Bank of Japan comments later on this week also highlighted one caveat, that the Bank of Japan rate hike decision depends on no negative Trump surprise.
Matt Jones
Well, that's the perfect segue into what's likely the biggest event for financial markets. Maybe this year. The presidential inauguration on what's set to be the billionaire's balcony. So how are we thinking about this?
Neil Staines
Absolutely, yeah, it's indeed a huge week next week. The inauguration and indeed the first weeks of the new Trump administration are clearly the dominant macro factor for financial markets. Now we saw the confirmation hearing this week for Treasury Secretary Scott Bessent, very significant in this regard.
While analysts and the media have subsequently emphasized the commitment to extending the tax cuts, implying further fiscal expansion under Trump 2.0. The dominant theme of the testimony was the need or the determination to reduce deficits i.e. focusing on the spending problem of the Us. On tariffs Bessent highlighted the three properties of tariff policy.
Number one being to counter unfair trade practices. Number two, being a revenue raiser bringing money back into the federal budget. And number three, as a negotiating tool having seen, the overuse of sanctions driving movement away from practices containing the Dollar, something that Bessent has spoken out against. So more of these factors we bring together in this week's blog, but from our view, this fiscal conservatism is not aligned with the dominant market expectation, and we still expect continued disinflation, growth moderation, and ultimately that to lead to equities supported, bond yields lower and the Dollar lower going forward.
It's a huge focus for markets next week, and if reports are to be believed, it's going to be quite the show.
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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