In this episode:
- German Elections: Political Uncertainty and Economic Signals
- Central Bank Speeches: Policy Signals in Focus
- US Growth: Key Data and Market Drivers
German Elections: Political Uncertainty and Economic Signals
- Coalition Dynamics: Smaller parties crossing the 5% threshold could impact the CDU/CSU’s ability to pass fiscal reforms.
- Economic Momentum: The IFO index will gauge whether Germany’s economy aligns with ECB optimism.
- ECB Policy Stance: Isabel Schnabel’s hawkish rhetoric could influence euro sentiment.
Central Bank Speeches: Policy Signals in Focus
- Bank of England Outlook: Comments from policymakers will clarify rate expectations after stronger-than-expected inflation and wage data.
- ECB Guidance: Schnabel and Nagel’s remarks may reinforce a hawkish stance, shaping rate expectations.
- Fed’s Balance Sheet: Discussions on pausing QT could have significant implications for bond markets.
US Growth: Key Data and Market Drivers
- Slowing Momentum? Weak retail sales and leading indicators raise concerns about the trajectory of US growth.
- Key Data Releases: Consumer confidence, Q4 GDP revision, and PCE inflation will shape market expectations.
- Equity Market Focus: Nvidia’s earnings report could drive significant volatility, with options pricing in a major move
Transcript (AI Generated)
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 Europe is likely to be the dominant focus at the start of next week, especially with the German elections over the weekend. How are we thinking about Germany and Europe more broadly over the coming days?
Neil Staines
Yeah, thanks very much, Matt. It's certainly a very big weekend for Germany. We get the elections, as you say, on Sunday, exit polls are expected straight after voting closes around 6 p. m. on Sunday evening. Now we should have a good idea on how the vote split has evolved pretty quickly after that, but going into the weekend expectations are that the CDU, CSU will poll around 30 percent of the vote, AFD around 20 percent of the vote, and SPD and Greens around 15 percent of the vote and we'll see how the coalition talks evolve, likely CDU, CSU with SPD and or Greens going forward. However, the slight complication might be involving the smaller parties. There are a few parties that are currently polling around the 5 percent mark and that is the threshold to get them into the Bundestag.
Now the fact that there is such a significant focus on a two thirds majority that is needed for constitutional change, certainly important for the widely anticipated or hoped for amendments to the debt break or an increase in defense spending as part of the fiscal change that markets are hoping for.
Then these small parties play a critical role in that if they reach that 5 percent threshold then their inclusion into the Bundestag likely decreases the percentage of the two or three way coalition government and they may not attain that two thirds majority. So a big focus there on the technicalities of inclusions into the Bundestag on Sunday evening.
From an economic standpoint on Monday, we also get the IFO, which is the industry participants equivalent to the financial analysts ZEW which showed significant rebound or some further strength. In this week and therefore, markets will be assessing whether or not we are starting to see some economic momentum in Germany something that Lagarde has referred to as the recovery in the Eurozone.
From a monetary standpoint, we also get Isabel Schnabel on Tuesday. Now she spoke earlier on this week and was very hawkish relative to broader expectations. In fact, she even talked about discussing Dropping the restrictive label of monetary policy at the March meeting that's certainly well ahead of market expectations and well ahead of what many would consider to be the neutral rate in Europe. Debate and forecasts over recent months have been about the ECB cutting rates in a clear path below that neutral rate, which, as we say, is broadly expected around that 2 percent level, and therefore, an updated narrative from Isabel Schnabel this week is going to be very closely watched in that regard. Another potential positive for Euro alongside the positive hopeful progressions on the Russia Ukraine war.
Matt Jones
Thank you, Neil. Now, with a relatively light data calendar again next week, but a raft of central bank speakers, What are we listening for next week?
Neil Staines
Yeah, absolutely. We get a lot of speakers next week from DM Central Banks.
From the Bank of England, we get Lombardelli Ramsden, Dhingra, and Chief Economist Pill. From the ECB we get Nagel and Schnabel. And from the Fed we get Barkin, Bostick, Hammock, and Harker. A full round of speakers if you will, next week. In the UK, that focus will be on the interpretation of this week's data where we saw wages, CPI, and retail sales all coming in on the hot side, and that itself, hot on the heels of Bank of England's growth downgrades.
We'll be watching or listening. As you say, with close interest to see how those central bankers interpret the run of data and how they see that as consistent with their growth expectations going forward, particularly given the fact that we see a likely exacerbated further in inverted commas, fiscal tightening in March.
MPC commentary next week however, will be very important in shaping those monetary expectations for 2025. In the ECB we've already touched upon this with Isabel Schnabel's comments from last week, but we'll be keenly listening for an update there alongside Joachim Nagel of the Bundesbank both at the hawkish end of the governing council spectrum.
So perhaps take that into account also. And then from the Fed recent testimony from Powell and the minutes of the January policy meeting have all been consistent. And we touch upon that further in this week's blog. The interesting point perhaps from the minutes was the mention of the potential stopping or pausing of QT around uncertainties of the debt ceiling negotiations that are impending.
Now, as we get closer to the Fed's judgment of an ample reserve holding this is a debate that could have significant implications for the long end of the bond market. So overall, plenty to listen out for next week from DM central banks.
Matt Jones
Now, while data remains light, I suspect the focus still remains on the US outside of Fed Speakers. What are we focused on from the US next week?
Neil Staines
Yeah, absolutely correct, Matt. Yeah, over recent sessions, we've seen A subtle emphasis change on sentiment towards US growth momentum, and we think that this has huge implications for equity markets and for monetary policy alike.
And again, this is something we expand upon a little further in this week's blog. We've seen weak retail sales last week. This week, we got a weaker leading indicator. We saw disappointing results from Consumer Benchmark Walmart. All of this set against moderating earnings growth forecasts and forward looking indicators.
So next week, we're going to have a significant focus on that growth potential and sentiment around that. On Tuesday, we get US consumer confidence. On Thursday, we get the revision to the Q4 GDP print, which itself did come in below expectations in the first iteration. So we'll be watching closely as to how that gets updated, including the component parts there.
And then on Friday, we get US PCE for January. Now we should know the component parts of the PCE, Cleveland Fed. Inflation now cast expects 2. 66 percent on that core PCE for January. And that is despite some upside surprises we saw in the CPI and PPI prints, the component parts add up to something much more consistent with the Fed forecasts.
Now, perhaps above the economic data markets will be watching very closely for the NVIDIA earnings on Wednesday. Now, options markets are pricing in a huge 9 percent move or volatility expectation on these on the announcement, and that's something like 300 billion in market cap, just to put that into perspective.
And speaking of volatility, of course, next week, we'll all be keeping a close eye on Trump headlines on tariffs, trade and, of course, geopolitics. Small on data, but another huge week for 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 time.
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