In this episode:
- UK Macro Challenges and the Bank of England
- Global Central Bank Week – A Raft of Decisions
- US Dynamics – Powell, the Fed, and Fiscal Friction
UK Macro Challenges and the Bank of England
Global Central Bank Week – A Raft of Decisions
- Diverging Paths: While the BoJ is expected to hold due to trade uncertainty, Sweden’s Riksbank may cut rates again, and the SNB could return to negative interest rates amid deflation.
- Market Implications: Central bank actions—especially from the SNB and Riksbank—may shape broader sentiment around policy easing in the context of persistent macro fragility and disinflationary pressures.
- Heavy Data Calendar: A full slate of data including Chinese activity, Japanese CPI, and German ZEW reinforces the complexity of interpreting global growth signals in the current environment.
US Dynamics – Powell, the Fed, and Fiscal Friction
- Policy Tension: Despite political pressure to cut rates, Neil sees fiscal dynamics, particularly the perception of continued fiscal stimulus, as a force restraining the Fed’s hand in the near term
- Disinflation with a Catch: While inflation surprised to the downside, rising concerns around labour market fragility (e.g. disappointing participation and continuing claims) complicate the Fed's path.
- Eyes on the Dots: With no move expected at the June FOMC, attention turns to the updated dot plot and Summary of Economic Projections, which could set the tone for markets amid rising macro uncertainty.
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 the UK has been back in the spotlight this week with the spending review and some important macro data. So how are we thinking about the UK as we head into next week? And of course we've got the Bank of England meeting.
Neil Staines
Indeed, it's another complex week for the UK, the Bank of England, and the Chancellor.
We expand on this topic further in this week’s blog, but essentially, we continue to view the glass as more half empty when it comes to the UK macroeconomy.
Now, Chancellor Reeves has come under pressure for not spending enough on defence, social care, and infrastructure, from various sections of the House, while at the same time being criticised for losing control of the UK’s debt levels. It is a tough job for the Chancellor at the moment. However, from our point of view, it is likely to get even tougher. That is something we have argued for some time now.
At the time of the last Budget, we suggested that it was a fiscal loosening that would feel like a tightening at the consumer level, and that the underlying economic momentum was in fact weaker than the data suggested.
This week’s employment data showed an acceleration in the pace of job losses in the UK, and highlighted a continuation and intensification of a trend that has been in place since that important Budget. The GDP print also pointed to further UK weakness in April. While Reeves was quick to suggest that some of the negativity might reflect the impact of Trump-era tariffs on exports, it remains a concerning sign for the UK economy.
Next week, we get the CPI and retail sales prints for May, either side of the Bank of England meeting. While the outcomes of those data points are unlikely to spur action from the Bank this time, particularly as it is not a Monetary Policy Report month, we continue to expect a faster pace of rate cuts in the second half of this year as economic weakness becomes more evident.
Indeed, pressure on the Bank of England to cut may become even more acute in the autumn, especially if, as expected, Chancellor Reeves is forced to raise taxes to balance the books in the face of a weakening economy. That would create a very complex and interesting backdrop for the UK for the remainder of 2025.
Matt Jones
Now it's not just the Bank of England next week, we also get a, now I have to confess here, I wasn't sure what the collective noun was for a group of central banks. Perhaps answers on a postcard. Gr says A cartel, copilots as a vault, and Gemini says a discretion. Pick whichever suits you. But we do get a. Raft perhaps of of announcements from central banks. So what are we looking for from global monetary policy next week?
Neil Staines
Yeah, absolutely. Thanks, Matt. We certainly do get a raft of announcements next week: the Bank of Japan, Riksbank, Swiss National Bank, Norges Bank, the Central Bank of Indonesia, the Bank of England, and of course, the Fed.
On the Bank of Japan front, while developments in Japan are very interesting, next week's meeting is unlikely to be. Global trade uncertainty likely precludes any near-term rate hikes, despite the fact that there have been encouraging price developments in Japan. The market is pricing in almost zero probability of a move at Tuesday’s meeting.
In Sweden, the Riksbank is expected to cut 25 basis points as growth and inflation fail to stabilise convincingly. This comes despite significant cuts from the Riksbank earlier in 2024. The Norges Bank, Bank of Indonesia, and the Bank of England, as we've discussed, are likely to remain unchanged.
Perhaps the most interesting event comes from the Swiss National Bank. Despite growth holding up relatively well, Swiss inflation turned negative in May, aided in part by a safe haven FX focus. Markets are pricing in somewhere between a 25 and 50 basis point cut from the SNB. With the policy rate currently at 0.25 percent, we may see a return to negative interest rates in Switzerland next week — an important development for global central banks and global markets.
We also see a raft of global data next week, including the China suite of data for May, the German ZEW survey, Australian employment, and Japanese CPI.
So, a big focus on the data front and a huge focus from central banks, all against what is a very complex and uncertain global macro backdrop.
Matt Jones
So that leaves us with the US and the Fed. Now Powell appears under pressure from the president, but not so much from the markets. How are we thinking about the US monetary dynamic?
Neil Staines
Yeah, great question, Matt.
Markets are currently pricing in almost zero probability of a move on Wednesday night, suggesting there is no immediate pressure on the Fed. Ironically, despite political pressure to cut, disappointment around fiscal consolidation — particularly the higher-than-expected debt level — is likely the key factor keeping pressure on the Fed to maintain tighter policy.
Looking ahead, we expect a more fiscally conservative evolution of US policy. This fiscal tightening could pave the way for greater monetary easing as the year progresses. Additionally, progress on the removal of the SLR and other technical factors around reserves could allow the Fed to guide market rates lower through 2025.
From an FOMC perspective, while markets are not expecting a cut this time, they will be paying very close attention to the updated dot plot and the Summary of Economic Projections. Inflation data released this week showed more disinflationary pressure than markets had anticipated, though more in line with our long-held macro views.
Some market participants are revising growth forecasts based on a lower-than-expected impact from tariffs on prices and, therefore, on the broader economy. However, others are more focused on the emerging signs of fragility in the labour market. Continuing claims were disappointing this week, and last week’s payrolls report showed a sharp drop in the participation rate. Both developments have upward implications for the unemployment rate, making the Fed’s job increasingly difficult at this complex stage.
Either way, Powell’s narrative around the growth trajectory, labour market concerns, and broader macro uncertainties will carry significant weight and is likely to be the dominant focus for financial markets 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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