In this week's Podcast
- Volatility and Market Sentiment
- UK Economic Outlook and Data
- U.S. Focus and CPI Expectations
Volatility and Market Sentiment
- Financial markets are facing ongoing volatility due to a combination of factors: the Fed's potential pivot, the risks of a U.S. recession, and global geopolitical developments.
- Uncertainty around the U.S. Presidential election and concerns over AI monetization in mega-cap tech stocks are adding to the overall market instability.
- Asset allocation, carry dynamics, and portfolio construction need to account for these elevated volatility levels.
UK Economic Outlook and Data
- The upcoming UK employment report, July GDP data, and Bank of England inflation expectations are the key data points for the week. Wage inflation in the services sector is a particular focus for the markets.
- UK’s economic trajectory is viewed as weaker than what the headline data suggests, impacting expectations for the Bank of England's rate decisions.
- The blackout period before the Bank of England meeting will force markets to interpret data without central bank commentary, heightening uncertainty.
U.S. Focus and CPI Expectations
- U.S. CPI data on Wednesday is expected to show progress, with the headline figure likely to drop to 2.6% and core CPI to remain at 3.2%.
- The downward trend in oil and commodity prices may provide the Fed with greater confidence in controlling inflation.
- U.S. equity sentiment might also be influenced by Apple's product launch earlier in the week, adding an additional layer to market dynamics.
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's been a volatile period for financial markets over recent weeks. How will we looking at this underlying volatility going forwards?
Neil Staines
Yeah, thanks very much, recent weeks I've seen a bit of a regime shift in terms of baseline volatility, as markets grapple with a few things the Fed pivot and the projections for US rate cuts going forward. Recession risk premium, also the markets are really struggling to price both policy and risk sentiment in relation to the possibility of a US recession or more recessionary global backdrop. There's also global geopolitics and of course the US Presidential election that are adding to volatility. On a more micro level concerns over AI monetization in mega cap tech and stocks have been of interest of late and certainly that is impacting sentiment.
Now, next week we see Apple's new product launch, and that may be an important barometer in terms of this monetization of AI going forward. Overall, we see Vol remaining elevated. Implications for asset allocation, carry dynamics, and portfolio construction, all important in relation to that volatility.
Matt Jones
Now putting politics to one side, we've had a couple of quiet , in the UK. But data is back on the radar. What are we looking out for in the UK next week?
Neil Staines
Absolutely. Yeah. Thanks Matt. Despite some recent political volatility, as you say, it's been very quiet on the data front for the UK. Now alongside the data as we move into the blackout period ahead of the Bank of England meeting on the 19th, there will be no central bank commentary and therefore markets will be on their own to interpret that data.
So on Tuesday we get the employment report for July, earnings will be a key focus there and certainly the specific breakdown of the persistence of wage inflation in the services sector. On Wednesday, we get the July GDP expected to rise a further 0.3%, but again, the focus will be on that breakdown especially the domestic demand components.
And on Friday we get the bank of England iPSOS inflation expectations data release. So again, giving us the full suite of employment, growth and inflation expectations in the UK next week. From our perspective, the UK economic trajectory is still slightly weaker than the headline data and market pricing currently suggest, and that has implications for the bank of England's expectations and the UK rate curve.
Matt Jones
And what about Europe next week? Obviously, as the starts of the September developed market monetary policy meetings with the ECB meeting. What are we expecting?
Neil Staines
Yeah, thanks again, Matt. Recent weeks have seen a market focused predominantly on the US with Europe, as you say, under the radar. Now, relative to the FOMC meeting on the 18th, the ECB is likely relatively straightforward. The market is pricing almost exactly 25 basis point cuts, consistent with the recent ECB narrative.
And so the focus will be elsewhere, or outside of that rate cut. We'll be looking at the new star forecasts particularly in relation to core inflation surprises that we've seen of late. But it's also worth noting that we've seen a move down in the dollar, and down in the oil prices, which should offset some of this upside pressure and also slightly lower growth. It should weigh on inflation there too. We're looking to see what the governing council members emphasis is on services resilience, and whether how that impacts their decision making, going forward. Notably, the commentary around fiscal slippage is something that markets will want to focus on as well. How national governments are continuing to expand their balance sheets As inflation, normalizes and growth slows is going to be a key factor for the ECB going forward. And also the rate guidance, if any. We would expect the ECB to continue the line of data dependence and not offer up any particular guidance. As to the path of rates going forward. Markets likely continue to price a 25 basis point cuts for the rest of this year.
Matt Jones
But I suspect the big focus will remain the US next week. What do we have in store?
Neil Staines
Indeed you suspect correctly, I imagined Matthew, yes, a US equity sentiment maybe shaped by Apple at the start of the week. But the big focal points will be on CPI on Wednesday, we're expecting a headline print to fall down to 2.6%, so much closer to that 2% targets. And that's down from 2.9% previously with core unchanged at 3.2. Likely therefore showing further progress.
And again with oil and commodity prices coming down, this should give more confidence to the Fed that the path of inflation is lower. And then on Tuesday we get the US presidential debates. Which should be fascinating viewing. There's been a significant shift back towards the Democrats, since Harris joined the race, and this will be important in that regard to monitor the trend, post that head to head.
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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