In this week's Podcast
- Volatility in financial markets
- Bank of England's upcoming meeting
- Key US economic data releases
Market Volatility
- The volatility is a continuation from previous weeks, largely driven by rebalancing operations and impending rate cuts.
- Inflation and rate hikes initially benefited large companies with substantial cash reserves and pricing power.
- As disinflation sets in and rate cuts take effect, those with higher relative debts and reduced pricing power may benefit.
- Position reductions and frustrations about AI revenue generation impacted the equity markets.
- Major tech companies like Microsoft, Meta, Apple, and Amazon have earnings coming up next week, which will be closely watched.
Bank of England: A Crucial Week Ahead
- The meeting is expected to see significant market attention, akin to an Olympic final.
- Markets are pricing a 50-50 chance of a rate cut.
- Key votes from the Bank's members will be closely analyzed, with Governor Bailey playing a central role.
- Political uncertainties related to the incoming government's fiscal stance may impact the decision.
- Despite current data, the long-held view is that the UK economy is weaker than it appears, making the Bank's decision finely balanced.
US Economic Data: A Busy Week on the Horizon
- It's payroll week with critical releases, including JOLTS, ADP, and non-farm payroll.
- The Employment Cost Index, the Fed's preferred measure of wage growth, will be essential. A sub-1% reading could tilt the proceedings towards a more dovish stance.
- Employment remains a dominant factor in the Fed’s reaction function, making any weakness in job metrics highly significant.
- Additional data on ISM manufacturing and consumer confidence will provide forward-looking indicators, adding more depth to the market's insights.
- The FOMC meeting will see markets pricing just one basis point, with the case for rate cuts becoming more pronounced due to clear disinflation and growth moderation.
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
We've witnessed significant volatility in financial markets this week largely centered around equity markets and broader sentiment. How are we thinking about this and what are we looking for next week?
Neil Staines
Yeah, absolutely. Thanks, Matt. You're right. Last week did see significant volatility, or continuation of that volatility, if you will, from previous weeks. This began in many respects as a degrossing or rebalancing operation across sectors and countries as a function of impending rate cuts. Essentially the argument being that inflation and rate hikes benefits those large magnificent seven, for example, whereby have huge cash piles, and strong pricing power; the argument being that when we turn around and disinflation hits and rate cuts come into power, then that benefits those with perhaps slightly higher relative debts. But reduced pricing power as inflation and rates move in the opposite direction.
So we certainly saw some of that and there's, it's still, an argument for that as rate cuts become more prominent. Last week, however this became more of a position reduction. And some frustration or impatience, if you will about the AI revenue generation relative to investment. Next week we see Microsoft, Meta, Apple, and Amazon, as well as more broadly, Intel, X, PayPal, and Qualcomm. So that debate's going to rumble on well into next week. It'd be a fascinating another week for the equity markets.
Matt Jones
And in the UK, there are also some clear signs of volatility ahead, but putting politics to one side, perhaps, next week is the Bank of England. What do we think?
Neil Staines
Absolutely very important week next week. And just just to note ahead of that on the same day, the Bank of Japan also meet and there's a very interesting meeting there too, we're currently priced around seven basis points. But with the recent narrowing of real rate differentials and a USD/JPY decline has become more of a focus. So the Bank of Japan may be the big surprise. But for us, the big focus, as you say, Matthew is the Bank of England. All the attention of an Olympic final with markets pricing, 11 basis points, or roughly 50, 50 chance of a rate cut. In June, the votes saw two votes for a 25 basis point cut, Dhingra and Ramsden. And the statement suggested that it was a finely balanced decision for three more. Now that those three more likely center around Governor Bailey. And it's expected. That the other two will vote in line with the Governor.
So we could be pretty much there, depending on the assessment of the situation at the meeting this week. Now, from a political perspective, the incoming government have suggested that the finances are worse than we thought. Now, whether you think that's credible or not, it might add some uncertainties to the fiscal rate path, and therefore some uncertainties to the Bank of England decision. But our long held view that the UK economy is weaker than the current data suggests still holds. Some doubts remain over inflation persistence in the service sector, but it will be a very close call to the Bank of England this week. A huge week for the UK and a huge week for financial markets.
Matt Jones
And what about the US? So it's payroll week again, but I suspect that's just one of many US focal points next week.
Neil Staines
It is indeed great point, Matthew. Yeah, it's a huge week for the US on the jobs front. We get JOLTS, ADP, and of course the non-farm payroll. But perhaps less focused upon, we get the employment cost index, the Fed's preferred measure of wage growth. If that were to come in sub 1%, then that would certainly give a more dovish bias to the proceedings. We continue to see employment as the dominant swing factor in the Fed's reaction function, and therefore any weakness across those jobs measures that we see this week may bring asset metric reaction in markets and, of course, the Fed. Now from a sentiment perspective we get ISM manufacturing and consumer confidence.
This may give us more of a forward looking momentum gauge. So they'll also be closely watched this week. And of course it is the FOMC. Markets are pricing, just one basis point, but as we outlined further in our blog this week with clearer disinflation, clearer growth moderation, despite the Q2 slight beat to the top side, and equity market volatility the case for rate cuts is clearly rising.
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.
Disclosure
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