In this episode:
- UK Macro – Growth Challenges Amid Fiscal Strain
- Global Economy – Data vs Sentiment After Tariff Tensions
- US Macro – A Pivotal Week Across Geopolitics, Fiscal, and Employment
UK Macro – Growth Challenges Amid Fiscal Strain
- Despite stronger-than-expected March retail sales, the UK’s medium-term growth trajectory remains weak.
- Fiscal deterioration, with a £152 billion deficit, raises the prospect of tighter fiscal policy and tax hikes.
- The combination of global uncertainty and fiscal tightening is negative for the Pound and points to a lower rates trajectory.
Global Economy – Data vs Sentiment After Tariff Tensions
- Signs of easing in tariff rhetoric (e.g., possible South Korea–US trade deal) helped global equities recover.
- Critical data next week includes German GDP, Eurozone CPI, and Chinese PMIs, serving as sentiment benchmarks.
- Central banks, particularly the ECB, are signaling less urgency for rate cuts, highlighting the fiscal-monetary policy trade-off.
US Macro – A Pivotal Week Across Geopolitics, Fiscal, and Employment
- Tariff developments, including potential new trade deals (e.g., South Korea), remain pivotal for sentiment.
- Key data releases (consumer confidence, ECI, GDP, non-farm payrolls) are likely to drive Fed expectations.
- Major US earnings (including Meta, Apple, Amazon) will offer insight into corporate and consumer resilience.
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 after some mixed signals in the UK this week, how are we thinking about the growth and inflation dynamic in the UK and what are we looking for next week?
Neil Staines
Yeah, thanks Matt. Great question. It's been an interesting time for the UK to close out this week we've seen retail sales are very positive at plus 0.5 for March.
Expected coming in at minus 0.5, so a positive outturn there, but ultimately we don't see that trajectory as being so positive in the UK in the medium term.
Now on the tariff front, there's no progress so far. Although the UK does not run a trade surplus with the US and therefore should be relatively close to the front of the queue for a trade deal and we'll come back to that potentially a little bit later. What is interesting from the policy perspective, Bailey was on the wires this week being interviewed at the IMF Spring meetings.
Bailey's view was that tariffs will have a negative effect on growth. That firms will be putting off investment and consumers remain uncertain and that inflation is much harder to predict. It did emphasize that we are focused on the growth shock, and that's certainly an area in which we see being the dominant driver of monetary policy reaction function in the UK.
Now, on the fiscal front, there's also been some progress this week. The data for the past 12 months highlights a deficit of 152 billion pounds, that's 22 billion pounds more than the previous financial year and much, much higher than the OBR forecasts. This brings back into question the fiscal headroom and brings back into focus the prospect of further tax hikes, or more fiscal tightening as we move forward towards the April statement, we cover this a little bit more in this week's blog. Next week we get commentary from Sir Dave Ramsden and from Clare Lombardelli on the MPC, and really the focus, the combination of global macro uncertainties and fiscal deterioration is not a comfortable one for the UK for the Pound and not for the Bank of England.
We'll be looking for further evidence as to the Bank of England's policy reaction function next week. And again, we discussed this a little further in this week's blog but the implications of tighter fiscal policy on the monetary policy trajectory for us lead us to a consideration of significantly lower rates in the UK.
Matt Jones
And what about the global economy? Tariff rhetoric may be cooling, but how are we thinking about data and events with respect to the rest of the world next week?
Neil Staines
Yeah, absolutely. Some signs as you say indeed of cooling in the tariff escalation or tariff rhetoric, so to speak with the tentative suggestion of the lowering, and also further exemptions in tariffs from both the US and China. Indeed Treasury Secretary Bessent inferred that we may even see a South Korea/US trade deal as soon as next week. Now we've seen a significant bounce in global equities and risk assets from the peak tariff escalation repricing, and a brief sell America sentiment period that saw US bonds and equities lower.
But from our perspective markets will now increasingly scrutinise the data against what in some global markets are higher equity levels than before the April the second reciprocal tariff announcements. So on the global data front, next week within Europe, on Monday we get German retail sales.
On Tuesday we get ECB inflation expectations. On Wednesday an important German Q1 GDP, certainly in terms of a benchmark or barometer for growth going forward, given the fiscal expansion that has been announced, yet, not likely plays a part in the data itself. And then on Friday we get Eurozone, CPI, that's the preliminary print for April.
Now set against that at the IMF meetings this week, we've seen what is a more balanced or perhaps less dovish rhetoric from governing council members suggesting that perhaps inflation is likely to stabilize around target without further shocks. And that policy already being at neutral may be sufficient.
So certainly. Playing down, therefore, on the emphasis of the need for further rate cuts. And that's again, something that we touch on in this week's blog in relation to that fiscal and monetary policy trade off. In the broader rest of the world, we get Australian CPI for March. On on Wednesday that may be a little retrospective.
However, Chinese manufacturing and service sector, PMI for April on Wednesday also may be a little bit more poignant.
On Friday we get the Bank of Japan and after the Tokyo CPI print overnight the progress towards tighter monetary policy in Japan is still intact. And that's not to mention that Suntory Japanese whiskey maker announced price rises of up to 25%. Very concerning for those, japanese whiskey appreciators. So I think still think that Japanese rates head higher, but it's more complicated against an uncertain backdrop in the near term. So that global data and European data very important next week in terms of developments and barometer of sentiment.
And it's that global economy and global trade changes that continue to be a big focus for global financial markets.
Matt Jones
And as has been the case for many weeks now, however, I suspect it is once again, the US that'll dominate. It's a big week across the board for the US this week. So what are the highlights we're looking out for?
Neil Staines
Yeah. Thanks again, Matt. It's a huge week for the US on the geopolitical front.
We'll be looking for further tariff rhetoric. Whether this dialing down of sentiment continues or not. There's certainly some expectation of this trade deal with South Korea. And of course perhaps closely following behind that, we may see the likes of India the UK and even Vietnam.
So we could certainly see some positives there. On the fiscal front, as we allude to further in this week's blog the bond market remains very sensitive to concerns about tariff escalation and or fiscal laxity undermining the long end. Last week treasury Secretary Bessent reiterated the administration goal of deficit reduction, however referencing that 3% handle that was part of the campaign messaging and any progress on that front will be very big in terms of its impact on the US curve.
On the data front we get consumer confidence for April on Thursday. And that's seen some significant declines and is expected to decline further. Very disappointing after the significant rally we saw on the Trump election on the expectation of deregulation. On Wednesday we get ECI, which is the Fed's preferred measure of employment cost, and that will be a big focus and policy relevant.
We also get Q1 advanced GDP. Now the Atlanta Fed Now cast currently shows expectations adjusted for the Gold Trade at about minus 0.4. Current market expectations are plus 0.2, and that is significantly down from the 2.4% we saw in Q4 and even higher throughout 2024.
So that mark slowdown in US growth will start to become a reality into next week and beyond. On Thursday we get ISM manufacturing, but in reality, next week is really all about employment. We get Jolts, ADP, and then on Friday, the non-farm payrolls. It is the number one sensitivity of the FOMC against the current backdrop.
The Fed posture is modestly hawkish in its bias at the current juncture. And that's likely as a function of the tariff threat and the need to anchor inflation expectations especially given the recent bond market wobbles. But this week's data may certainly change that in terms of the Fed's reaction function.
We'll be looking out for that very closely. And then lastly, we get earnings from the US. It's a very big week. Some of the highlights being PayPal, Qualcomm, meta, Microsoft, apple, and Amazon. And even on the consumer front releases such as Hilton and Booking. Dot com may be interesting to see how that consumer is holding up in the light of this uncertainty.
Either way, it's a huge week. It's the US that dominates and it's gonna be a big focus across earnings, data, fiscal and geopolitical risks in the US next week.
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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