In this episode:
- Central Bank Policy Divergence
- Key Economic Data in Focus
- U.S. Elections and Fiscal Implications
Central Bank Policy Divergence
- Mixed Monetary Paths: Australia, Norway, and Sweden’s central banks take contrasting actions, reflecting varied approaches to inflation control and economic stability.
- Bank of England’s Measured Approach: The Bank of England maintains a calm stance, staying out of political debates and projecting a return to target inflation, with expectations for future rate cuts as financial conditions tighten.
- Global Market Implications: These policy differences underscore the complexity of managing inflation in an uncertain economic landscape.
Key Economic Data in Focus
- Political Focus Shifts to Data: With recent political events subsiding, markets are turning attention back to economic indicators, especially from the UK, China, and the US.
- Crucial Releases Ahead: UK GDP, China’s October data suite, and US CPI will be instrumental in shaping market expectations.
- Tracking Policy Responses: As these data points unfold, markets will monitor how central banks respond to evolving economic signals.
U.S. Elections and Fiscal Implications
- Election Impact on Fiscal Policy: U.S. election results bring renewed attention to potential fiscal expansion, impacting market expectations for growth and inflation.
- Persistent Disinflationary Trend: We believe disinflation will continue to dominate despite fiscal expansion speculation, challenging inflationary market narratives.
- Dollar Weakness Expected: With restrained fiscal moves and steady growth, a softer dollar is anticipated over the medium term.
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 following on from the significant central bank activity that we've seen this week, there are a lot of central bank speakers next week. So how are we thinking about developed market monetary policy evolution?
Neil Staines
Yeah, thanks Matt. Great question. This week, outside of the significant election Vol premium we have had a lot of developed market central bank action. The RBA left rates unchanged at 4.35 percent, arguing that rates will remain sufficiently restrictive until they are confident that the CPI will return to target against what is a very complex wage and housing market dynamic. In Norway, the Norges Bank left rates unchanged at four and a half with a very different narrative arguing restrictive policy is still needed to bring inflation down but that gradual rate cuts may begin next year. The Riksbank at the opposite end of the spectrum in Sweden cut rates 50 basis points to 2. 75%, the fourth and biggest rate cut this year. They are primed for a further rate cut in the first half of 2025 with inflation risks still linked to the Krona FX rate.
However, the most important meeting this week, considering that we are recording prior to the FOMC, was the Bank of England. We expand a little bit more in this week's blog, but essentially, the message from the Bank of England was one of calm. They were very clear not to be drawn into the political debate over the budget decisions or tariffs.
But Bailey suggested that the path of inflation will rise as a function of front-loaded fiscal and energy base effects but will return to the target inflation throughout the forecast horizon. Essentially, what's important here is that the market pricing is significantly higher than the projections that the Bank of England used in order to make their inflation projections. And therefore, we consider financial conditions to be significantly tighter, and we maintain our view that there will be more rate cuts in the UK than are currently priced by the market.
Now, next week, we'll be watching central bank speakers very closely, including the Fed, to see whether that narrative is consistent with market pricing or otherwise. We've got Lagarde and Schnabel of note in the Eurozone, Bailey in the UK and notably in the US, we'll be listening out for Fed Waller.
Matt Jones
And what about the macro data? How are we thinking about the data calendar? And what are we looking out for next week?
Neil Staines
Yeah, thanks, Matt. The macro data has been off the market radar a little over recent sessions as politics has dominated in the volatility space.
Next week, however, data comes back onto the radar. We start with UK Q3 GDP, the first estimate there, and that will become a benchmark for the UK post-budget growth trajectory. It is also important for a progress report for the Bank of England. With political volatility in Germany, data will be both a focus and a distraction at the current juncture.
ZEW will be key to see any wobbles in analyst optimism around the current breakdown in government. China remains a big focus with the NPC meeting at the close of this week, all eyes will be on the stimulus announcement and the timescale of implementation. Next week the data suite for October will also be very important in this regard.
We get industrial production, retail sales, fixed asset investment, and the unemployment rate, another important post policy pivot barometer for China. Likely, however, the US CPI will gain the most focus next week.
As markets wrestle with the impact of Trump on the inflation trajectory, it'll be a big week for global data, big week for US CPI and we'll be watching events pan out very closely.
Matt Jones
So as you've mentioned, and as listeners are no doubt more than aware, we've had the U.S. presidential election. We've seen the market volatility. But what are we thinking about U.S. monetary and fiscal policy interactions in the U.S. And what does that mean for the US dollar?
Neil Staines
Yeah, that is a great question, Matt. And I think the question at the heart of the market debate at the moment we expand upon some of these points further in this week's blog. But essentially in the run up to and post the election, the sell side narrative has been very clear.
Trump equals higher equity markets on deregulation predominantly higher inflation on tariffs higher yields on a proposed fiscal expansion and therefore a higher dollar. Now we agree with the first in that equity markets are likely to outperform. However more broadly than that, we maintain our macro views that disinflation will remain the dominant theme in the US.
Now, if we expand that to the recent election, 40% of voters made the economy their top election issue. That is not consistent with an economy which is currently running at above 3% quarter on quarter annualized. There are clearly some issues under the surface. Now we see high absolute prices, and certainly the impact of those high nominal prices on the lower three quintiles of the population. We see high absolute prices and impacted lower three quintiles of the distribution as the rationale behind that. And therefore we see it very unlikely that the Trump administration will pursue policies that will drive prices higher.
So we'll be looking at that very closely. We also believe that tariffs will not be used indiscriminately and therefore are unlikely to have the negative growth and positive inflation implications that extrapolated market expectations currently think. And further on yields we also expect that it will not just be tax cuts that will add to the fiscal expansion, but there will also see spending cuts that will balance that out too. Therefore for the dollar, the combination of continued disinflation and growth moderation with no fiscal expansion should be a backdrop that is consistent with a soft landing and the trough of the dollar smile.
And therefore we continue to see a broad dollar weakness over the medium term. Now this near unity from the sell side is interesting. It's based on extrapolation of assumptions that we disagree with in general. And next week and for the next few weeks, we expect this to be a big focus.
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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