In this episode:
- UK: Budget Impact on Macro and Markets
- Japan: Election Impacts and Economic Stimulus
- US: Pre-Election Economic Landscape
UK: Budget Impact on Macro and Markets
- Governor Bailey's Influence: This weekend, Governor Bailey will speak at an international banking seminar, with markets closely watching for any clues ahead of the November 7 policy meeting.
- Chancellor Reeves' Budget Changes: Upcoming UK budget adjustments will include a new debt measurement approach to protect unprotected budgets, potentially enabling pledged investment spending.
- Fiscal Policy Implications for Markets: Key focus areas are changes in taxation and the scope of fiscal expansion, which could influence UK credit and yield curves.
Japan: Election Impacts and Economic Stimulus
- Japanese Election Overview: Prime Minister Ishida's party may face challenges in retaining an absolute majority, impacting potential policy adjustments.
- Bank of Japan Policy Pressures: A weaker election outcome for Ishida’s party may limit Bank of Japan tightening, with implications for the yen and economic policy direction.
- Stimulus Anticipation: Expected economic stimulus could be necessary if the ruling party faces losses, likely impacting the yen and broader economic sentiment.
US: Pre-Election Economic Landscape
- Corporate Earnings Week: Major tech and consumer companies are releasing earnings next week, shaping pre-election sentiment and equity markets.
- Job Market Focus: Key employment data, including JOLTS, ADP, and nonfarm payrolls, will inform Fed expectations and US economic trends.
- GDP and Manufacturing Data: Q3 GDP and ISM manufacturing data will be in focus for growth outlooks, with baseline volatility expected to heighten as the US elections near.
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 relatively quiet week from a data perspective, next week looks set to be very busy indeed. So let's start with the UK and the budget. So how are we thinking about its impact on the UK macro?
Neil Staines
Yeah, great question Matt, thanks very much. There's a huge couple of weeks coming up for politics and economics globally.
And next week, the UK will be very much front and center. Now, Governor Bailey speaks on Saturday at the G30 annual international banking seminar in Washington, and it's his last chance to shape the monetary narrative ahead of the November the 7th policy meeting. Markets are currently pricing only 24 basis points or a 96 percent probability of a 25 basis point rate cut in the UK, and from a data perspective, despite the downside surprise to inflation, headline inflation coming in at 1.7 percent year on year in September, and on the growth front including employment, which dipped down to 4 percent and retail sales which were marginally stronger in September has seen marginally better than expected data. However, we maintain our view that the UK growth backdrop is weaker than the recent data suggests, and that ultimately the path of rates will be steeper in the UK going forward.
However, as you mentioned, Matthew, the big focus in the UK next week is likely to be on the fiscal event or the budget. Chancellor Rachel Reeves has been clear that there will be a change in the way that the UK measures its debt in the fiscal rules. Essentially, this will prevent cuts to unprotected government budgets and enable the new government to fulfil its spending pledges, likely on the NHS and forward looking investment. Markets will be closely watching to see in particular changes in taxation across corporate, income, discretionary capital gains and also inheritance taxes and what the likely implications are for growth going forward from changes to those, and also on the size and scale of the fiscal expansion, including due to changes in the accounting rules, and there will be a keen focus for credit and curve dynamics. It's a long way from fiscal dominance in the UK, but the budget is likely to have a big impact on the future action from the Bank of England. It's a big week for markets, governments, household, businesses, and the Bank of England, and a big week for the UK.
Matt Jones
A big week indeed. But what about more broadly? What are we watching for next week in the global economy?
Neil Staines
It is a very big week for the global economy. We get a hot start, if you will, with the Japanese election over the weekend. Now, polls suggest that Prime Minister Ishida's LDP party may come close to losing an absolute majority, potentially even with their coalition partners, New Komeito.
The market perception is that the weaker the LDP showing, the greater the pushback against Bank of Japan tightening going forward from the government and also, the greater the need for economic stimulus with obvious implications there for the Yen. Now, exit polls should give a clear indication well ahead of the opening on Sunday evening, so that's certainly something to look out for over the weekend. Going into next week, we get China PMI data for October. It's likely still too early to reflect the ongoing stimulus in China, and on that note this week there's been the announcement that the very important MPC meeting to announce stimulus policy implementation, and details, has been delayed until the 4th to the 8th of November. Interestingly, that now comes after the US election, very important in terms of targeting the correct response in terms of the export market, dependent on what they're likely to expect from the next president of the United States. But any signs of improvement in sentiment or activity will continue to be closely watched across the PMI data, even it is a little early to reflect the full impact of that stimulus. In Europe. The debate in Washington this week has been around the prospect for a more rapid increment of rate cuts in Europe, whether or not there will be a 50 in December. On balance, we think that the rhetoric remains indicative of a 25.
We also get Q3 GDP next week, and at least, in terms of market sentiment, that may be important for the 25 versus 50 basis point debate. Likewise, we get CPI; markets and central bankers alike are expecting a bounce on energy base effects at the extent of which, will be watched very closely, and indeed going forward, we expect the China stimulus will have a positive impact on Europe as well as on China.
Certainly relative to very negative current sentiment towards the Eurozone.
Matt Jones
And finally, the US Presidential election is fast approaching. Now we're seeing some movement in the polls, but still within the margin of error. What are we looking out for next week?
Neil Staines
Yeah, thanks, Matt. Again, it's a huge week for the US next week. We get a raft of top tier equity earnings with Alphabet, Meta, Microsoft, Apple, and Amazon all reporting next week alongside some industrial and consumer barometers likely to shape the equity narrative, at least pre election sentiment. It's jobs week. We get JOLTS, ADP, and of course, nonfarm payrolls.
Markets are expecting 120,000 headline print for the payroll number, that's down from 254,000 in October and an unemployment rate unchanged at 4.1%. Now, September, as we referenced last time out, contains a lot of seasonal adjustments and likely have been very distorted by COVID disruptions in the sample space over recent years.
It's even possible that we could see a negative print in the headline if we see some correction to the previous data and a minus 100 adjustment for storms and strikes as was suggested by Fed Governor Waller earlier this week.
Either way, it will be very important for Fed expectations for the US curve and for the dollar. Next week we also get a Q3 advanced GDP on Wednesday. Now the Atlanta Fed Now Cast has US growth for the quarter around 3.4 percent quarter on quarter annualized. Perhaps a high bar for a topside surprise.
And ISM manufacturing for October post payrolls on Friday will also keep attention focused on the data into the close. Of course, the baseline volatility will remain high as the Presidential elections reach fever pitch. So again, another big focus for the US in global financial markets.
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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