Federal Reserve's Stance
The focus shifts to the Federal Reserve's recent announcements, where Powell's comments hinted at a more dovish bias with no immediate rate hikes expected. The market reacted positively, leading to a boost in equities and bonds while weakening the dollar.
Global Central Banks and Policy Shifts
Next week, a range of global central bank speakers are scheduled, including the RBA meeting in Australia, where a neutral policy stance is anticipated. The overall global backdrop is expected to reflect a more supportive risk and rate environment following the Fed's narrative.
European Central Bank's Rate Cutting Cycle
In Europe, the ECB's key focus remains on potential rate cuts post-June, with uncertainty lingering beyond that. Data releases, including German trade and IP data, may complicate the narrative for rate cuts as recovery progresses in Germany.
Bank of England's Outlook
With a focus on the UK, the Bank of England's MPC meeting holds significance, especially amid weaker growth indicators and normalized inflation levels. Expectations point towards a more explicit dovish bias from the Bank, setting the stage for potential rate cuts in the summer(?).
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 after a week, very focused on us data and the fed trajectory. How will that impact our global focus next week?
Neil Staines
Yeah, absolutely. The Fed is a distinct and clear focus of markets at the moment as we expand upon a little further in this week's blog. Essentially the market expected a hawkish pivot from the Fed in light of what we've seen in terms of higher inflation and selectively better economic data. The main change to the statement was that there has been a lack of further progress towards the committee's 2% inflation objective, not quite the hawkish pivot that the market was looking for.
However Powell said that inflation is still too high, the economy is resilient and the labor demand is still outpacing supply. Essentially meaning that gaining confidence in rate cuts in the US is taking a longer than expected. However, markets also expected a shift in this symmetry of policy risks, ie, they expected that there was going to be more of a narrative around the possibility of hikes; Powell suggested that it was unlikely that the next move would be a hike, that expectations remain that over the year, inflation will continue to decline and that over the year itself policy will be sufficiently restrictive. All together, the more dovish bias was retained by the Fed, rate hike, risks were essentially priced out for now, and the QT taper that we saw that was announced for the June meeting was larger than expected and also in itself tilts a little bit more dovish. So that led to a more positive outcome for equities, for bonds and a weaker dollar.
Next week, we get an array of global central bank speakers, an RBA meeting where policy will be expected to be unchanged as the balance of risks to policy in Australia shifts back towards a more neutral, after a weaker retail sales print following on from a higher CPI print. So the global backdrop will certainly be taking its cues from this pullback in hawkishness or inferred hawkishness from the Fed. Overall a more supportive risk and rate backdrop isn't likely next week.
Matt Jones
So as we move into may, how does the fed narrative and the wider market sentiment feed into Europe? And also expectations for the ECB rate cutting cycle.
Neil Staines
Yeah. Great question, Matt. Powell in his speech this week talked about economic paths , in terms of the evolution of inflation of growth. Albeit at times when he was trying to evade questions, asking him about the possibility or probability of events causing rate hikes. But the ECBs key focus is on the path of rate cuts, beyond what is now a fully priced cut in June. Now there are a number of speakers throughout the week, but senior members of the governing council are clearly more cautious about signaling any clear policy path post June. The fed narrative will bring the cuts more into play for June, but beyond that as we say remains more vague. And the data next week, including the Sentix investor confidence data for May, and in particular German trade and IP data for March, may complicate this further as the recovery potentially builds in Germany, especially with wage inflation data, still above target. That may certainly complicate the extended narrative for rate cuts in Europe. Also we get the ECB minutes from the April meeting on Friday, and from that we make it a better idea of the debate within the governing council about the growth and inflation trade offs. Both in the near term and importantly, in terms of the future policy path, how they are likely to evolve over time.
Matt Jones
And with the week, starting with a UK bank holiday focus shifts firmly to the UK as the week progresses with the bank of England. What are we expecting from Threadneedle street?
Neil Staines
Yes indeed. After a well-earned bank holiday this weekend, we get Q1 GDP and the monthly reading for GDP for March on Friday, but the big focus will be on the MPC and I suspect that the MPC would have given, been given a bit of a nod on that Friday GDP print. Now, recent data is suggestive of a weaker growth backdrop. Certainly a more cautious household finances, even though they remain in a relatively good state on the whole, and finally, broader signs of normalizing inflation and labor markets. Indeed, we anticipate the CPI prints through the summer will come in below the 2% targets, a spot of sunshine on the inflation front, if not in the sky. This is very important from a Bank of England perspective with the MPR projections likely to come in below target at the forecast horizon, at the two year and the three year point. And now this is likely, we think, to lead to a more explicit dovish bias from the Fed. And after proclaiming that the balance of risks are shifted to the downside, there is a distinct prospect that Sir Dave Ramsden joins Swati Dhingra in voting for a rate cut at this meeting. Although ultimately we don't expect a rate cut from the Bank of England to come until the next MPR meeting and that's on August the first either way, a huge focus for UK markets and a very big focus for UK mortgage holders alike.
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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