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 last week we discussed the recent developed market central bank decisions and communications. How's the central bank focused evolved this week?
Neil Staines
Yeah, thanks, Matt. The central bank narrative is still very dominant in terms of sentiment positioning and flows. There have been plenty of speakers across the U. S. and Europe. And ultimately the message remains that whilst policy is restrictive and inflation is falling central bankers across developed markets are requiring more data. Not necessarily better data. but some more confirmation. There is a clear view that from a central banker's perspective the risks of not quite getting inflation back down to target outweigh those of inflation moderately below target and ultimately that's resulting in a slightly slower reaction function or a hesitant central bank reaction function at the moment.
In this week's blog we touch on this and a number of other current macro debates. We discussed the recent data and whether or not there are seasonal anomalies within that, i. e. adjustments. That overestimate the current trajectory of the U. S. economy, but also more globally. The current debate about whether there has been an upward shift in R star, or in short whether or not with the economy continuing to outperform with the current level of rates how much rate cuts are required in the longer term.
And also in the U.S., specific to the U.S. The issue of monetary transmission, i. e. How the tightness or certainly historical tightness of U.S. policy is impacting firms when they were given the ability to pre hedge or borrow money at low rates ahead of the rise in in rates, and similarly, from a household perspective having low rate mortgages that haven't changed against a backdrop of cash earning a significantly higher number.
So this question mark around a positive net interest margins at corporates and positive balance sheets at the household level meaning that monetary policy transmission isn't occurring in the way that historically has done.
Matt Jones
So how's the data in the week ahead likely to shape that debate?
Neil Staines
Yeah, it's a very good point. We get a couple of leading indicators next week. We get ZEW from Germany. That's going to focus attentions back on the German industrial model and how Europe growth evolves, European growth evolves from here.
We get Empire and Michigan sentiment releases for February. But really the focus is going to be all about the U. S. data, all about CPI and retail sales. Expectations on the inflation print are to drop to 2. 9 on the headline, 3. 7 percent on the core. And for retail sales to be unchanged, although we do envisage some downside risks to that number.
Now the debate is going to be showed there higher. Releases. That means a higher inflation print and a higher retail sales number will shape the debate back towards a higher all star, a slower fed reaction function on a continued backup in rates. Weaker data will lead us markets to question the data.
January data more. Specifically the strength that we saw in payrolls and average hourly earnings and also to start repricing rate cuts once more. So a big week for data, big focus on the U. S.
Matt Jones
And a little bit closer to home, of course, it's a big week for the U. K. What are we looking for from the UK and how's this going to impact my remortgaging efforts or, no, sorry, monetary policy?
Neil Staines
Absolutely. Yeah, no, thanks mate. It is it's a very big week for the UK, obviously. Starting with the England Wales rugby match in the Six Nations from Twickenham on Saturday.
But the big data focus is going to be Wednesday's CPI print that's for January. Thursday's GDP print, that's Q4 and December. And Friday's retail sales data. Now, the Bank of England forecasts indicate the end of a hiking cycle, though it's a very convoluted manner, sandwiched between their forecasts conditioned upon unchanged rates at target and their inflation forecasts conditioned upon market rates significantly below target or inferring that the Bank of England will have to take action in between those two scenarios.
But the data focus this week is really gonna focus that narrative shape, the dissents that remain on the monetary policy committee. Importantly, now, in both directions, we have a dissent in favor of cutting and as the next move and a dissent in two dissents in favor of hiking as the next move. Next week's data is gonna be very important on that front and is gonna put the UK back in focus from a rate perspective.
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.
Disclosure
This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.
ESLJ-090224-P2
Subscribe to our insights
If you are interested in our content, please sign up below and we will deliver Eurizon SLJ insights right to your inbox.
I consent to my data being collected and stored for the purposes of providing me information regarding my enquiry and related services. If you have any questions about your data please contact us at research@eurizonslj.com
Our Research
Our written research products aim to provide unique and orthogonal insights on key global economic and policy issues in a timely fashion.
