In this week's Podcast
- China's Stimulus and Global Impact
- European Data and Implications for Rates and Currency Markets
- US Employment Data and Fed Policy Outlook
China's Stimulus and Global Impact
- China announced significant monetary and fiscal support measures, though it's too early to gauge long-term effects.
- Stimulus could boost Chinese consumer confidence, which is crucial for global growth, particularly significant for Germany and Europe.
- Key Chinese data next week (PMIs) might be less impactful due to the recent national holiday and market closure.
European Data and Implications for Rates and Currency Markets
- Weak data in Europe, particularly from French services and inflation prints, raise questions about the economic recovery.
- The European Central Bank (ECB) is closely monitoring inflation, though next week's CPI print may exaggerate the prospect of future rate cuts.
- Despite economic weakness, the weaker dollar outlook continues, with our bullish view on EUR/USD remaining counter to consensus.
US Employment Data and Fed Policy Outlook
- The US remains the dominant focus for financial markets, particularly regarding labor market data and its influence on Federal Reserve policy.
- Markets are keenly awaiting employment data next week, including JOLTS, ADP, and nonfarm payrolls, with expectations of job growth around 140,000.
- Any surprises in unemployment data could significantly shift expectations for future Fed rate cuts, maintaining the US at the center of market attention.
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 we've seen significant announcements this week of support measures for the Chinese economy. How are we thinking about this from a macro perspective and what are we looking at next week?
Neil Staines
Yeah, thanks very much, Matt. As you say, some significant measures this week. Now, it's likely a little early, still to gauge the long run implications of these measures, but as we discuss a little further in this week's blog the events of this week have been very significant from a monetary perspective and from a fiscal perspective, and while it's not clear how the property problem will ultimately be resolved, this is potentially very significant from the perspective of chinese consumer confidence; and critical to the growth dynamic. Now from a global macro viewpoint, it's also potentially very significant. Rebounding Chinese growth has big connotations for the global economy and likely disproportionately positively for Europe and for Germany and for global risk assets, this combination of Fed rate cuts and the China stimulus or recovery should be a very constructive backdrop. Next week we get the government and Caixin PMI data for September, slightly backward looking perhaps after this week's revelations. And the national holiday for the remainder of next week. From Monday onwards. Effectively, it's a short pause in what has been a very hectic period of trading for Chinese assets in bonds and in equities. And a big focus on the reopening of those markets on Tuesday, the 8th of October.
Matt Jones
Very interesting and potentially significant connotations for Europe, as you say. And talking of Europe, how are we looking at European rates and currency markets with a focus on the data next week?
Neil Staines
Yeah. Great question, Matt. China is potentially a huge multiplier to this European recovery. And therefore has potentially very significant implications for rates and currency markets. The recent data has been on the weak side in Europe. Certainly the flash PMI data for September. Interestingly, we get the updated or final reading for that next week. But that was weak. With notable weakness in French services as a hangover after the Olympic games. However, it was not clear that is the ultimate trajectory of that particular data series. We've also seen weakness this week in the French and Spanish inflation prints for September. However next week we get the Eurozone CPI print, noting very clearly that Lagarde did point out at the September ECB meeting, not to extrapolate the weakness in the September inflation print. Because base effects likely lift the inflation numbers going forward. Last week we argued that a Fed 50 basis point cut would heighten the probability of 25 basis points at the October ECB meeting, which was played down in September by President Lagarde and also heightening the prospects of a 50 basis point move in November from the bank of England. This recent data has pushed out pricing for October to around 20 basis points and that 50 and a half basis points by the December meeting. Next week we hear from Lagarde, Lane and de Guindos, the top table of the ECB.
So that may give us further clarity on the intention around that October meeting. The UK, not quite there yet, at just 27 basis points priced for that important monetary policy report month in November. Now from a currency perspective, we maintain a negative dollar view. And more broadly, the events in China, we feel. Likely improves the risk and growth outlooks globally, and keeps the dollar macro configuration at the trough of that dollar smile. EURUSD, top side remains our favorite bias and that's still significantly out of consensus.
Matt Jones
And what about the US? Next week is employment report week, and I suspect the US remains a key focal point for markets in the week ahead.
Neil Staines
Absolutely US is still likely the dominant focus for financial markets. And again, as we discussed in the blog this week, now that the FOMC is more confident on reduced upside risks to inflation. Growth, and in particular, the labor market is likely to be the key Fed policy reaction function. Markets are pricing 37 and a half basis points of rate cuts in November, that's exactly where it was going into the September meeting, where they delivered 50 basis points.
Employment data will be key to the evolution of that pricing, and we get a huge raft of employment data this week. We get JOLTS job opening data on Tuesday and ISM manufacturing, both of those will be keenly focused to see how this balance. Within the jobs market is playing out. ADP on Wednesday, iSM services will be critical to that perception of the growth backdrop in the us. And then the big focus on Friday of next week with nonfarm payrolls.
Now markets are expecting around 140,000 job gains for the month of September, and it's important to put that into context. Equilibrium rates or the rates at which prices above can cause a fall in the unemployment rate is around 150, so anything below that keeps the bias to the top side. The unemployment rate expected at 4.2, and in the context of the Fed summary of economic projections, number 4.4, any upside surprise, there will be notable. The US remains the dominant factor from a data perspective. But as we have seen this week, the global macro economic backdrop is evolving and there are now more moving parts.
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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