In this episode:
- Global Economic Indicators
- Central Bank Actions and Policies
- U.S. Election and Market Sentiment
Global Economic Indicators
- Recent data shows a slight improvement in the Eurozone, with Q3 GDP and inflation metrics exceeding expectations, suggesting resilience amid global uncertainties.
- Upcoming indicators like German factory orders and Eurozone investor confidence could further influence market sentiment.
- Employment reports from New Zealand, Canada, and critical U.S. ISM services data will be central in shaping the global labor market outlook.
Central Bank Actions and Policies
- Several central banks, including the RBA, Norges, Riksbank, US Federal Reserve and Bank of England, have upcoming decisions, with most expected to maintain current rates amidst mixed economic data.
- Australia's inflation drop may spark discussions on future rate cuts despite ongoing labor and housing concerns.
- The Bank of England faces complex fiscal dynamics, and the Fed’s press conference will be closely watched for indications on U.S. growth and rate cut trajectories for 2025.
U.S. Election and Market Sentiment
- Financial markets are pricing in potential outcomes of the U.S. election, with notable volatility expected in derivative markets.
- A delay in final results from swing states like Georgia and North Carolina may prolong market uncertainty and volatility.
- Recent market behavior indicates a possible Trump win scenario, driving dollar strength, higher yields, and cautious equity performance amid varied earnings reports.
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 it looks set to be another complex week for financial markets with some key focal points in the week ahead. Perhaps we can start with the data though, and we can move to events shortly. What global data points are we looking out for next week?
Neil Staines
Yeah, absolutely. Thanks very much, Matt. In Europe this week, we've seen some slightly better-than-expected data. Eurozone Q3 GDP print coming in at plus 0.4 percent quarter on quarter. That's double expectations. And on the inflation front, we've also seen rebounding in the European inflation print led by Germany.
And again, a little bit more than expected. As we've been saying over recent weeks markets have been pricing perhaps too much in terms of extrapolated negativity into Europe and perhaps too much in terms of extrapolated positivity into the U S this week's data has perhaps been a little consistent with that view.
Next week, we will get German factory orders and Eurozone Centix investor confidence, both of which may help gauge this ongoing theme. A little further afield. New Zealand and Canada both have employment reports to follow on from the US at the close of this week. Labor markets continue to dominate the macro view via the monetary channel. Perhaps next week's most important data set will be the US ISM services data for October. Now, after an unexpectedly strong bounce in the data for September, we'll be looking to see whether or not the October print corroborates or contradicts that bounce. The dominant service sector is very important for inflation, the labor market dynamic, and the U. S. Monetary policy trajectory. And we'll be watching that closely next week.
Matt Jones
We discussed last week, the macroeconomic and geopolitical backdrop remains uncertain and volatile. How do central banks fit into this complex backdrop, and what are we looking for next week?
Neil Staines
Yeah, it's a great question, Matt. It's a huge week for DM central banks. Next week, we get the RBA, Norges and Riksbank and, the Bank of England and FOMC on top of that. In Australia, we expect rates to remain unchanged at 4.35%. But it's an increasingly interesting backdrop in Australia.
This week, we saw the September print for inflation fall from 2.7 percent in August to 2. 1 percent in September. And that is likely to reignite the rate cut debate in Australia, despite an increasingly complex labor and housing market backdrop. The narrative from Michelle Bullock will be very important in that regard from the RBA.
Norway are expected to keep rates unchanged at 4.5%. Inflation remains a little bit more resilient and above target, at least until energy base effects play out in Norway. In Sweden, the situation a little bit more different with The inflation profile below target and growth less strong on that front.
This likely enables the Riksbank to cut further markets are expecting 50 basis points to 2.75 to 2.75 percent after three 25 basis point cuts in the cycle so far this year, perhaps more importantly, or a bigger focus for wider markets, though the UK is going to be a central focus this week. Following on from this week's budget, the focus will remain on the UK and on the curve.
We have for some time now had the view that the underlying UK growth dynamic is weaker than [00:04:00] implied by the official data and the budget this week likely adds to the complexity on that front, not least due to the emergence of bond vigilantes on the Fiscal concern in bond markets. Now, technically the budget constituted a significant fiscal loosening with a 71. 6 billion or 2. 6 percent of GDP in public spending.
However, with 41 and a half billion or one and a half percent increasing tax rises then it may well feel like a fiscal tightening at the consumer level. This further complicates the job of the MPC. Now the OBR forecasts suggest a higher inflation path as a function of the increasing spending from the budget.
This may lead to a more cautious Bank of England in the near term, but from our perspective into next year, we continue to see sharper rate cuts than are currently priced by the market as growth slows, perhaps even below the OBR's downgraded growth forecast for the projection period. It's an MPR month, so we do get updated projections from the Bank of England and that will include a great focus on the fiscal impact or the Bank of England's analysis of the fiscal impact throughout the forecast horizon.
So it's a very big week for the Bank of England and a big week for UK rates markets. And lastly, on the central bank front, we get the FOMC the fed are expected to cut rates by 25 basis points. But all the focus will likely be on the press conference and the narrative around growth especially after this week's payroll report.
We expect some acute focus on the U. S. curve and in particular, the implied rate cut path for 2025. And it's going to be a big week for the Federal Reserve. But of course the Fed is only the second biggest event in the U. S. next week.
Matt Jones
And finally, the elephant in the room, or donkey, depending on your political persuasion, it's the US election. So how are we thinking about events of next week and beyond?
Neil Staines
Absolutely. Yeah. Huge focus this week from financial markets on the U S election. Now, recently. We've had a very significant volatility premia or day weights risk premia built into a derivative pricing over the next few days.
And this Vol premium is consistent with significant moves on the announced results. However, as they say, timing is everything on. It's not clear when a winner will be announced. For example, swing states Georgia and North Carolina are expected no sooner than five days after the polls close. So that could be An additional factor of uncertainty over the course of coming days, prolonging the uncertainty and the risk premium in markets.
Now, over recent weeks, we've seen markets actively pricing a Trump win with a dollar higher yields, higher, and also equities higher. Although the last couple of days have seen a more cautious equity backdrop at least in part due to some more cautious earnings guidance at the consumer level going forward into Q4.
However you look at it next week is a huge week for central banks is a huge week for us politics, and it's a huge week for my 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 week.
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