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 a relatively quiet week, albeit with some important data, of course, next week is all about central banks once more. Where do we start?
Neil Staines
It is indeed. Yeah, exactly. We get some data.
So the China suite of data out next week for February, that's Retail Sales, Investment, Unemployment and Industrial Productionand t hat will be interesting post the Lunar New Year celebrations. We may get a rounder picture particularly after this week's unchanged LPR rates and a slightly disappointing total social financing.
In Germany, we get the ZEW and IFO again, both for March, and that will be an interesting inference as to whether or not we are seeing any firmer stabilization in the Euro zone and more broadly. Global flash PMIs will then back that up on Thursday, and that's also for March, and it'll be interesting to see how the balance between Manufacturing and Services activity continues. But really it's all about Central Banks next week.
As you say, Matthew, we get two of the smaller Central Banks in the DM space the RBA and this SNB. The Reserve Bank of Australia will be focused on the progression of inflation. Which has been spurred by growth in domestic demand fueled by immigration and the Swiss National Bank on the other side have an issue with lower inflation and so markets expecting them to cut at some point too.
But really it's all about the major Central Banks, the Bank of Japan, the Bank of England, and of course the FOMC.
Ahead of that, we do get commentary from the ECB's Lagarde, Lane, and Isabel Schnabel, in Frankfurt and that will be important for markets to gauge the reaction function of the ECB and to see if we're still on track for June for the start of the cutting cycle in Europe.
Matt Jones
Of the major bank announcements, why don't we start a bit closer to home?
What do you think markets are going to be looking for from the 'Old Lady of Threadneedle Street' this week?
Neil Staines
Absolutely. Thanks for that. Yeah. So yeah, no recent data has been a little disappointing. We've seen further easing in the labor market, a tick up in the unemployment rate to albeit just 3.9%. Some more dovish rhetoric from Bailey this week, talking about the temporary nature of first round effects, and the declining risks from second round inflation impacts. Ahead of the Bank of England, we also expect a significant decline in the CPI. That's for February and to 3.6% on the headline rate and a core rate of 4.6%, that's down from 4% and 5.1%, respectively. Now, this is likely to shape a more dovish Bank of England, especially if, as we expect, the Services component of the inflation also continues to come down, and we expect that to lead to a vote split shifting from 1-6-2, that's six members voting for the governor's proposition of unchanged rates, one for a rate cut and two for a rate hike at the past meeting. We expect that to shift to 8-1 with just one member dissenting in favour of a rate cut. So we're definitely a clearly more dovish bias to the Bank of England going forward. We continue to see underlying growth in the UK as weaker than headline data suggests.
And as we said in last week's piece and this week's blog the fiscal event that we've seen recently is less important, economically and politically than the inflation and monetary trajectory, and therefore the Bank of England really does hold the key. We get house prices, retail sales, CPI, and the Bank of England a huge week next week for the UK.
Matt Jones
So moving further afield, there's been a lot of commentary this week in particular around Japan especially in relation to equities and currencies. So what are we looking for this week from the Bank of Japan?
Neil Staines
Yes, that's right. So a huge amount of speculation, as you say, and debate over the Bank of Japan this week, but also more broadly centered around the removal of the yield curve control policy and negative interest rate policies.
Now, the 10 year yields have been relatively contained despite this ongoing debate or the speculation around the removal of yield curve control policy at the 10 year point. And that's obviously been helped by wider global bond buying and disinflation, a condition which we have previously suggested would be significant in this regard.
Local news agency Jiji has had numerous articles this week about the prospects of removal of negative interest rate policy and a replacement of the traditional yield curve control policy, by a more quantitative auction process. Now, higher wage deals have been agreed and published this week, and that's certainly increased the probability of a move with huge implications for bonds, Yen, and likely equity markets if we are eventually to see this move away from maximalist monetary accommodation.
The bigger picture. We also see the decision in the context of global capital flows as very significant. So potentially historic moment for Japan after more than two decades of fighting deflation, some signs of normalization of monetary policy.
Matt Jones
Excellent. So that now leaves us the United States and the FOMC. How are we looking at the prospective action and the rhetoric at the meeting next week?
Neil Staines
Yeah, absolutely. The other Central Bank meetings that will be important and a big focus in their own rights.
But the big event of next week is clearly the FOMC. The March meeting comes with updated SEPs, the summary of economic projections, and the all important updated DOTs. Recent data has been a little noisy, especially around the seasonal adjustments and one off year end factors in the January data, but we remain of the view that the dominant macro factors are continued disinflation and growth moderation.
Now Q1 tracking estimates for GDP have been revised lower further post the Retail Sales data this week labor market metrics continue to demonstrate a normalization and supply and demand. And in fact in the household survey immigration is likely pushed up the break even payroll growth pushing up the equilibrium level of job growth required and therefore suggesting we may even be closer to rate cuts in the U.S. Inflation has been noisier, but still consistent from our perspective with a move towards 2 percent over coming months. Now with rates well into restrictive territory as Powell has reminded us on many occasions to us this likely means lower interest rates and if growth slows and then potentially those interest rates can come significantly lower given that we see neutral rate around 200 basis points lower than where we currently are. Still the dots will be very keenly watched, specifically with reference to whether or not the median dot remains at 3 cuts for 2024. And the SEP is also very closely watched particularly in relation to the unemployment rate projections previously at 4.1% and also inflation projections given the recent noise that we've seen. It's a huge week for Central Banks, a huge week for markets but a big week for US rates and the dollar.
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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