In this episode:
- UK Growth Outlook and Data Focus
- China Stimulus: Uncertainty and Market Reactions
- ECB Meeting and Europe’s Economic Trajectory
UK Growth Outlook and Data Focus
- UK growth may be weaker than implied by recent data, particularly compared to Europe.
- Signs of wage gains slowing and fiscal support diminishing are expected to weigh on inflation.
- Key upcoming data: employment report (Tuesday), CPI (Wednesday), retail sales (Friday) will shape the Bank of England's decisions.
China Stimulus: Uncertainty and Market Reactions
- Markets have seen volatility as China rolls out liquidity expansion and monetary easing.
- Upcoming fiscal updates and GDP data are crucial, but expectations remain cautious.
- China's stimulus narrative is likely to drive market sentiment in the near term.
ECB Meeting and Europe’s Economic Trajectory
- Weak European data and inflation have led to expectations of a 25bps ECB rate cut.
- National central banks largely support dovish moves, but some dissent remains.
- The fiscal stimulus from the EU’s Next Generation funding offers potential long-term growth support.
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 after a period where political headlines have dominated the UK backdrop. Next week looks like it may be more interesting from a data perspective. So what are we looking out for next week?
Neil Staines
Yeah, thanks very much, Matt. It's an interesting week for the UK. Indeed. Now we expand upon our thoughts slightly more in this week's blog, essentially around a long held view that the UK growth backdrop is weaker than implied by recent data and certainly Sterling outperformance in relation to Europe. Now more recently we've seen signs of wage gains slowing significantly, and the fiscal backdrop is likely less supportive going forward. Now that growth slowdown likely becomes more apparent with wages and energy outside of the recent price pressures, likely to weigh on stubborn services inflation in the UK. The bank of England reaction function is likely to become incrementally more dovish, and we certainly don't rule out. A 50 basis point cut in November with the revised projections for the monetary policy report month.
Next week, we'll be focusing on employment report on Tuesday, CPI for September on Wednesday, the retail sales. Release for September on Friday, all instrumental in shaping the debate on Threadneedle streets and a couple of weeks time an important focal point for markets next week.
Matt Jones
Now events in China, continue to impact global markets and sentiment. So how are we looking at events from a global macro perspective and what are we looking for next week?
Neil Staines
Yeah. Thanks Matthew. As you say, we've seen huge volatility in the equity market in China and a sharp jump in volatility in what has been a previously very stable fixed income market as government stimulus packages emerge. The complication being that so far, we've had significant liquidity expansion, monetary easing, and the pledge of fiscal support.
So far, we've had significant liquidity expansion and monetary easing, and a pledge of fiscal support. What markets need to know now is the size and composition of that fiscal stimulus. In that regard, Saturday is very important, not an emergency meeting Saturday is a working day in China this week. But it's been announced that we will get a fiscal update on Saturday. And markets will wait with bated breath, but not necessarily particularly high expectations. Next week on the data front, we get CPI and PPI, that's for September, and that also comes over the weekend, and Q3 GDP print alongside the suite of data, industrial production, retail sales, fixed asset investment and the unemployment rate will come on Friday. Given the stimulus that data is probably a little backward looking and sentiment is still likely to be driven by the evolving stimulus narrative in China next week.
Matt Jones
Of course, it's also the ECB meeting next week. What do we expect from Europe?
Neil Staines
Yep. Back to Europe this week. So following the weaker than unexpected PMI data from Europe in September, and the lower CPI print, even if this was well flagged in advanced by President Lagarde as a potential outlier, markets have keenly priced a 25 basis point cuts in October from the ECB, and brought nearer. The rate cut trajectory from the ECB now, national central bank speakers have been consistent in this regard. Even the Germans are usually more at the hawkish end of the governing council spectrum, Latvia, the only central bank governor offering any pushback towards the 25 basis point cut at this meeting in recent commentary.
So commentators, analyst and curves alike have sharply repriced, ECB cut expectations to a point where short of implying a 50 basis point increment at some point, dovish expectations may actually be hard to beat. Especially from our perspective, with a China seamless and significant fiscal in the form of a next generation EU funding to boost growth, and realign economic and industrial models overcoming years.
So it's certainly not all negative from a European perspective.
Matt Jones
However it does continue to be a, quite a complex global macro backdrop. So how are we thinking about this week's events in relation to the broader macro picture?
Neil Staines
Yeah, that's a great question, Matt. We've seen volatile China stimulus expectations across equities and commodities. We've seen a volatile data series and extrapolation of the risks associated with those.
Again, the topic that we touch on in this week's blog. We're seeing the buildup towards the us presidential elections, and of course important develop markets, monetary policy decisions along the way. Against this elevated baseline volatility our core macro views remain little changed with some notable risks as you would expect, particularly in relation to the inflation and risk dynamics from any escalation in the middle east. But ultimately we see continued growth moderation and not recession, and continued disinflation, which should ultimately be a positive regime for risk assets, positive for bonds alongside continued monetary normalization and negative for the dollar.
On the positive side the China's stimulus story offers implications for demand redistribution, and more likely support all three of those. Q3 earning season, let's not forget, corporate earnings and their potential implications on the Fed reaction function going forward.
So overall broadly unchanged, macro views, but more alert to the evolving backdrop.
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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