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
After what's been a very busy week for data in the US and also Europe, and I'm sure we're going to come back to that in just a moment next week brings the UK back into focus. How will markets be looking at the events of next week, do you think?
Neil Staines
Yeah, absolutely. We have had events this week from the UK in the form of the budget some minor tinkering essentially in the form of a 2 percent cut in the national insurance rate something of an election sweetener. However as we expand upon slightly in the blog essentially we see the inflation trajectory and the Bank of England's trajectory as much more important than the fiscal adjustment that we've seen.
And I think that in part at least played out in the Chancellor's mind. That it was more important not to influence either the guilt market or the inflation. So even with without any bank of England speakers next week the big focus is gonna be on UK data and how that shapes that inflation and Bank of England trajectory.
We get unemployment or the employment report. Next week we also get the monthly GDP data. For January we get some house price and Bank of England inflation expectations, but really it's going to be about the inflation and growth path and the inference for the Bank of England.
Matt Jones
On that note, this week also had the ECB meeting how do you think the market will digest the meeting decisions and the policy guidance over the course of this next week?
Neil Staines
Yeah, very good question, Matt.
I think we expand on this slightly again in this week's blog. Essentially, the ECB left the deposit rate on hold at 4 percent and gave the narrative that we are not yet there on inflation. Certainly not strong enough or durable enough inflation decline in order to to warrant that elusive rate cut just yet. On the growth front the ECB were very clear, they revised down the growth expectation or the growth path for 2024 and , moderately raised the projection for 2026.
The focus was on external weakness at the moment with domestic demand growth and inflation, much more stubborn, slightly more encouraging narrative. From the ECB and indeed on the inflation front whilst the projected inflation path was downgraded to 2.6% this year. And the important 2.1% for core inflation in 2025 just above target and implicit that the direction of travel for the ECB is therefore down.
But leg guard and the ECB president was very clear. They're not yet sufficiently confident and need more data. That data will be received as we progress. And she was very explicit in saying that. There is a little more data by the time of the April meeting, but a lot more by the time of the June meeting.
And on that basis, market is duly pricing around 18 percent chance of a red cut starting in the April meeting, but very firmly concentrated fully priced for the June meeting. Now, after Lagarde spoke, we did and actually played down division among the ECB. That was a topic we discussed in last week's podcast.
We see Lane next week Chief Economist Philip Lane next week and that really is going to be key to the the unity and the messaging from the ECB around that June start to the rate cutting cycle.
Matt Jones
Timing is everything and obviously a big focus on ECB speakers next week. Just as the Fed and the Bank of England go into the blackout period ahead of the policy meetings on the 20th and the 21st, so what events will guide the U.S. markets without official commentary?
Neil Staines
Absolutely. Good point again. Yes, I think, important to note also that next week the U.S. clocks change. Important to note that in relation to waiting for the U.S. data to come out. It's another huge week in reality for the U.S. data CPI print.
To being the pick of the bunch on Tuesday, we're looking for inflation around 3.3 percent on a core basis and 3.1 percent on the headline. And also retail sales, which are expected to bounce slightly in February. Now if the ECB message was that they're not there yet this week's narrative from Powell at the semi annual testimony to Congress was that the Fed are not far from the conviction needed in order to begin the removal of accommodation of the removal of restrictiveness of U.S. policy. Our view continues to be that further disinflation and growth moderation is the dominant macro factor in the U.S. With logical implications for bonds, for equities, and for the dollar.
And next week. will be very important in regards to the growth and inflation trajectory. It's a less busy week in all, but big hitting data nonetheless.
Matt Jones
Fantastic. Thank you, Neil. I look forward to catching up with you again next week.
Neil Staines
Thanks very much, Matt. It's been a pleasure.
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