In this episode:
- China: Watching for Stimulus and Data Updates
- US: Balancing Fiscal and Monetary Policy Amid Inflation Concerns
- UK: Evolving Monetary Policy and Economic Prospects
China: Watching for Stimulus and Data Updates
- China’s economic trajectory remains in focus, with key January data releases expected next week, including CPI, PPI, and new loan data.
- US tariffs and potential retaliatory measures continue to create uncertainty for global trade and markets.
- Stimulus from China is unlikely before the Two Sessions in early March but will be crucial for future recovery signs.
European Central Bank: Cutting Rates with a Cautious Outlook
- Fiscal policy under the Trump administration is expected to tighten, contrary to market expectations of unchecked expansion.
- A structurally lower energy price environment and potential tax increases could reduce deficits and lower long-end yields.
- Disinflationary forces may allow the Fed to continue cutting rates, despite temporary inflation risks from tariffs.
Bank of England: Rate Cuts Expected Amid Economic Slowdown
- The Bank of England’s 7:2 vote for a 25 basis point cut signals a potentially more aggressive easing path ahead.
- Inflation is projected to rise temporarily before falling below target, while wage growth is expected to slow significantly.
- Fiscal tightening could lead to further monetary easing, providing a modest relief for mortgage holders in 2025.
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
It's been another complex week for financial markets. It's lots of moving parts globally and China, of course, is back from the spring festival break. So how are we looking at China? And what are the focal points?
Neil Staines
Thanks, Matt. China has been at the forefront of the global macro debate for a long while now. Domestically, the arguably, to a certain degree, at least self-induced property market slowdown has had huge implications for domestic demand, for consumer confidence, and notably for local government finances.
While at the end of 2024 government stimulus measures seemed set to reverse the negative trajectory, Trump 2.0 and potential tariffs and economic measures have delayed this stimulus, at least in part. Positive stories such as DeepSeek and the progress of tech in China further heightened the China focus globally, and next week, we do get CPI and PPI data for January.
We get new loan data, which should give us an update as to the current economic trajectory, and further information about tariffs and economic restrictions from the US, will also be very closely watched, as well as any retaliations. But so far, at least, the China reaction has likely been muscular enough to satisfy domestically, but not too aggressive to bring more measures from Trump.
At least not yet. Markets will be keenly watching for signs of stimulus from China. Although that's not really expected before the two sessions in early March, and any signs of recovery from the data are hugely important to the global trade dynamic where the US is likely currently the source of uncertainty, tariffs and trade with China are central to that and will be top of mind next week.
Matt Jones
So tariffs and the Trump administration agenda are clearly the dominant macro factor at the moment. How are we thinking about the fiscal and monetary interactions in the US? And how does that evolve next week?
Neil Staines
Yeah, thanks, Matt. That's a great question. We discussed this key focal point further in this week's blog, but from our perspective, this really is the key question for 2025.
On the fiscal front, markets continue to see the Trump administration policies as inflationary in the quest for growth, both via direct tariff impacts and via unchecked fiscal expansion as the market sees it. Now, we disagree. Rather, we expect the Trump administration to actively pursue the Bessant 3 3 3 policy.
That's 3 per cent growth driven by an extra 3 million barrels of oil and a 3 per cent deficit target, notably not the 6 per cent or 7 per cent deficit that markets continue to expect. A structurally lower oil energy price dynamic can bring inflation down. And if deregulation can improve supply as efficiency gains and also some potential tax raises, as we've seen later on this week,
then the deficits can continue to reduce. Long-end yields can also come materially lower. If, as we suspect, disinflationary forces continue, the Fed can continue to cut rates, despite the potential near term tariff induced price risks that we are inclined to see as more temporary by nature and, again, that tighter fiscal stance enabling looser monetary policy in the US. Now, next week, we will get CPI, PPI, and retail sales, as well as the update on small business optimism, which quite clearly showed an enormous jump as Trump came into office. We'll see how that plays out, particularly given the fact that deregulation so far has mainly been concentrated in the energy markets.
There are many moving parts. But at the core is the fiscal trajectory, and we are more inclined to see tighter, not looser fiscal on net. As we say, that can lead to looser monetary settings in the US now, and this dynamic is absolutely critical for the Trump administration, for the Fed, and for US assets going forward.
And it's going to be something that we're likely to be focusing on for some weeks now.
Matt Jones
Of course, it's been a huge week for the UK, mortgage holders will likely be happier after this week's rate cut. But how are we thinking about UK monetary policy going forwards? And did the February MPR change that?
Neil Staines
Yes, absolutely. Indeed, the UK mortgage holders should be very happy indeed. A 25 basis point cut from the Bank of England took bank rates to four and a half percent, but more significantly, what was expected to be an 8 1 vote, with one being a dissent in favour of unchanged rates. Turned out to be a seven two vote with two dissents in favor of a 50 basis point cut, so clearly the intimation of further rate cuts or perhaps even an accelerated rate cut path going forward.
Furthermore. Where the Bank of England, sees some energy induced upside to inflation in the near term, the growth path was revised materially lower, bringing inflation back below target at the forecast horizon. Now the bank projections also see a rise in the unemployment rate, through the forecast period.
And bank agents forecast pay settlements to be somewhere in the region of 3. 7 percent in 2025 versus 5. 3 percent last year. Now with bank inflation forecasts conditioned on market rates, seeing inflation rising to 3. 7 percent before declining in 2025, we could see an almost complete erosion of the positive real wage gains sequentially throughout the course of this year. Now, this week, a backdrop is something we have projected for many months now on has been exacerbated likely by the autumn budget.
While markets now price between two and three more cuts this year, we expect this to be ultimately too conservative. Similarly to the US, we expect fiscal tightening in the UK, although for very different reasons, to lead to looser monetary policy. So positives for the UK economy are few and far between,
But the news for mortgage rates through 2025 may prove a silver lining.
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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