In this episode:
- Germany’s ‘Whatever It Takes’ Moment: Bold Fiscal Moves and Global Market Ripples
- China’s Growth Reboot: Stimulus Measures, Inflation Targets, and Currency Dynamics
- US Economic Crossroads: Payroll Projections, Fiscal Restraint, and Monetary Adjustments
Germany’s ‘Whatever It Takes’ Moment: Bold Fiscal Moves and Global Market Ripples
- Germany is spearheading a major fiscal expansion with a 500 billion euro SPV and structural changes to borrowing rules.
- New measures—such as exemptions from the debt break for defense spending and enhanced local government borrowing—mark a departure from traditional fiscal conservatism.
- These policy shifts are already impacting market dynamics, influencing Euro-dollar levels, equity performance, and European yields.
China’s Growth Reboot: Stimulus Measures, Inflation Targets, and Currency Dynamics
- China is reinforcing its growth agenda by reaffirming a 5% target, increasing deficits, and issuing special bonds to boost consumer confidence.
- The stimulus strategy is designed to counteract trade tensions and tariff pressures, paving the way for improved domestic demand.
- These moves likely contribute to a rebalancing in currency markets, particularly positioning the yuan more competitively against the US dollar.
US Economic Crossroads: Payroll Projections, Fiscal Restraint, and Monetary Adjustments
- The US is charting a less expansionary fiscal course compared to Europe, reflecting a commitment to fiscal conservatism amid evolving market conditions.
- Expectations of a slowdown in payroll growth—due in part to a reduction in both direct and indirect government hiring—are influencing broader economic sentiment.
- This divergence in fiscal policy between the US and Europe could drive a more dovish, data-dependent approach from the Fed, impacting the dollar’s trajectory.
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 yet another complex week for financial markets with ongoing global trade uncertainty at the fore. However, in many respects it was Europe and perhaps more specifically Germany driving the Macro environment this week. So how are we thinking about Europe looking into next week?
Neil Staines
Yeah. Thanks very much Matt. It's been a complex week indeed. A huge week for Europe as Germany the longtime anchor of fiscal conservatism within the Eurozone announced its intention for huge fiscal expansion. Expectations ahead of the German elections were for some changes to the debt break.
But this is of a different magnitude. The surprise announcement from Mertz came with 500 billion Euros SPV for infrastructure investment. Exemption to the debt break for defense spending above 1% of GDP and the introduction of local government borrowing material implications for Germany, for European and for global markets.
Now we expand on this a little bit more in this week's blog, but Germany's whatever it takes moment, hot on the heels of commission Head Von der Leyen's announcement. Of re-arm Europe Defense Plan of very significant events through the course of this week. The market reaction so far has been to take Euro dollar higher German equities higher and European yields significantly higher now, against a backdrop where global asset allocators are reconsidering US exposures and hedge ratios in relation to the questioning of US exceptionalism, this really is a very significant development. Next week likely brings an attempt to ratify the changes to the Constitution that are required in Germany for all three of these measures before the newly elected MPs take their seats, and the parliamentary maths becomes more complicated. Now we see this as a bad and potentially risky precedent going forward, but ultimately that seems to be the direction of travel. Now, the ECB also this week was a halfway house between recessionary growth outlook, pre fiscal change, and an upgraded growth and inflation projections ahead.
Commentary from Lagarde and Bundesbank Nagel next week will also be closely watched as we reassess the situation across the Eurozone. Overall, it's a regime shift in Germany that likely has broad and long lasting connotations for Europe, for the Euro European assets next week. And also beyond.
Matt Jones
Now we've also had some positive developments in terms of stimulus from China's NPC and the key focus of the two sessions. So how are we looking at China and the global economy more broadly into next week?
Neil Staines
Yeah. Thanks very much Matt. Again, very significant developments in China over recent days. While sentiment is complicated by the special attention the US appears to be paying to China in terms of tariff policy, china stimulus is very notable. A recommitment to the 5% growth target a higher deficit and a lower but likely more strongly enforced inflation Target. And increasing special bond issuance all complement China's desire to stimulate demand and increase consumer confidence.
Next week we get CPI and PPI at the start of the week. And that will be important and watched very closely in terms of its role as a barometer of current domestic demand. One other important factor is the RMB or Chinese yuan. Now markets have long been near unanimously of the view that dollar China trades significantly higher as a function of the US tariff policy and indeed of US exceptionalism.
And now recent dollar declines exacerbated by German stimulus and indirectly via China stimulus, likely weigh on that Dollar China in our view, and we maintain our out of consensus view that the CNY outperforms relative to the US dollar. Indeed we reiterate our core view of dollar weakness more broadly with Euro a key driver this week.
So next week we will be watching for official rhetoric, trade announcements and the inflation data from China but also very closely for the dollar in particular against the RMB.
Matt Jones
Now finally, it would be remiss of us to leave out the US of course, from our weekly catch up. But we are ahead of the payrolls, which will be later on this afternoon. Within that context, how are we thinking about the US next week?
Neil Staines
Absolutely remiss indeed the US in terms of rates, the dollar, and of course trade policy not to mention fiscal developments.
Will continue to be a key focus or the key focus for financial markets. Now, having witnessed a significant impact of the proposed fiscal expansion in Germany this week we continue to view the likely fiscal trajectory of the US as being less expansionary, if not entirely contractionary, again this is a very counter consensus view, and this likely has significant implications for relative monetary policy trajectories again, a topic that we touch on in this week's blog, essentially fiscal conservatism in the US likely implies greater monetary activism or lower rates with the opposite, true in Europe.
And implications for the dollar, therefore to us at least, are clear. Now after this afternoon's payrolls and without forecasting the figure we maintain our negative view on payroll gains over coming months at least on the basis of a halt to direct and indirect government hiring a point that we've made and several times and blog, and here now we get CPI and PPI next week. And they're both gonna be a policy relevant focus and the market's gonna be watching those very closely, particularly given what we're seeing in the backdrop for the dollar. Now adding all this together, we see a dovish, asymmetry to Fed policy going forward, governed by the data in terms of pace, but we continue to see disinflation and growth moderation as the dominant macro themes. And of course, we will continue to watch for tariff and trade headlines. So it's gonna continue to be another big week for the dollar, another big week for the US and another big week for global financial markets in general.
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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