In this episode:
- United Kingdom: Fiscal Strain and Growth Risks
- Europe & Japan: Politics Meets Policy
- United States: Payrolls Take Centre Stage
United Kingdom: Fiscal Strain and Growth Risks
- Politics has taken centre stage as fiscal deterioration intensifies.
- A significant fiscal tightening is likely, with sharp downward revisions to growth expected from both the OBR and Bank of England.
- Pressure is building on the Bank of England to cut rates faster, with a 50bps move in November a distinct possibility.
Europe & Japan: Politics Meets Policy
- France faces a looming no-confidence vote, with risks of a new Prime Minister and widening spreads.
- In Japan, weak leadership may trigger a political shift, reducing the probability of an October BoJ rate hike.
- Eurozone inflation, retail sales, and ECB commentary will remain closely watched, though little new guidance is expected.
United States: Payrolls Take Centre Stage
- US data flow is critical, with ISM manufacturing and services surveys offering trajectory signals.
- The jobs market dominates: JOLTS, ADP, and non-farm payrolls are pivotal for Fed policy.
- Four key payroll components: unemployment rate, full-time vs part-time mix, catch-up hiring in education/healthcare, and revisions.
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 headlines have been dominated by politics of late, but from a more macroeconomic perspective, how are we looking at the UK next week and beyond?
Neil Staines
Indeed. Yeah. Thanks Matt. Politics have been centre stage in the UK, as the disappointing growth, and at least in some areas, spiraling spending has focused attention on the fiscal deterioration, and how the Chancellor can plug the hole in the public finances in the autumn budget.
We don't yet have a date for the fiscal event, although it's likely at the end of October, but we do have plenty of speculation about where the funds for the fiscal black hole will come from. Now, as we have discussed here and in recent blogs, we see the impending significant fiscal tightening, needed to get the finances back on track, as having material growth implications in the UK.
Now, the likely result is that once these measures have been announced, a sharp downward revision in the growth forecast from the OBR and the Bank of England will follow. And this puts pressure on the Bank of England to cut rates faster. We've certainly discussed our view of the prospect of a 50 basis point rate cut from the MPC in November, provided of course that fiscal event comes in time, and thus pressure on Sterling and FX markets that follow as a result. Now next week we get retail sales for July, the delayed retail sales print in the UK, and that's an important gauge of the current trajectory of UK consumption.
That weakness at this stage does, in our view, exacerbate the already quite serious problem that we're starting to face in the UK.
Matt Jones
And how about more globally? What are we looking out for next week?
Neil Staines
Yeah, absolutely. Politics is also dominant more globally, as a fast-approaching no confidence vote in France, as the government fails to garner support to cut its own fiscal deficits, it comes a week on Monday. But headlines, and the rising prospect of a new Prime Minister, will be a big focus into next week, French spreads maybe even pushing above Italian by then.
In Japan we await the Sue Kasu, the survey of the upper house election, and if weak leadership appears to be the dominant reason for poor performance by the LDP at the recent upper house elections, then we see a new Prime Minister in Japan also as a distinct possibility. And that in itself could reduce the prospect of an October rate hike from the Bank of Japan.
However, our main focus will be on the data. Final global PMI activity data for August come next week in the Eurozone, CPI data for August also, and retail sales for Europe more broadly after a very disappointing reading for Germany to end this week. And ECB President Lagarde speaks on Wednesday.
Following the ECB minutes from the July meeting, where the narrative appeared comfortable with the fact that their cuts to date are consistent with being at the terminal rate in Europe, at least for now. And therefore we would expect little new from Lagarde, but markets will be paying attention to Europe next week all the same. And then more broadly, we get China PMI data over the weekend. Poland are expected to cut by 25 basis points on Wednesday, and we get inflation data from a broad range of emerging market economies. All a big focus for next week.
Matt Jones
However, I suspect next week, being payroll week, one of our favourites, we'll continue to see the US being dominant. Again though, putting politics to one side, what are we looking for in the US next week?
Neil Staines
Yeah, absolutely. Thanks Matt. You know, we start next week very slowly with the Labor Day holiday on Monday. But next week really is a huge week for the US, for data, for markets, and for the Fed.
On Tuesday, we get ISM manufacturing data, and on Thursday, the services counterpart, and both of these will be watched very closely as barometers to the current economic trajectory, especially after the PMI showed a slight bounce in the equivalent months. Ultimately, though, it's all about jobs. A topic we expand upon further in this week's blog, likely the most dominant and consequential macro factor in global markets at the current juncture. We get JOLTS on Wednesday, ADP on Thursday, and of course, non-farm payrolls on Friday. Now, in this week's blog, we highlight four key components to interpreting the payroll data. The unemployment rate itself, a crucial barometer and close to very critical and self-fulfilling levels in our view, and more underlying themes. The full-time versus part-time breakdown, catch-up hiring in the education and healthcare sector, and whether or not that's coming to a close, and also any further revisions to the data itself. Now politics likely continue to make the headlines, but for us it's the jobs data that dominate the macro.
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.
Disclosure
This communication is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525) having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926). This communication is treated as a marketing communication intended for professional investors only and is provided only for information purposes. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, or the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this communication, save to the extent agreed in any written contract entered into between ESLJ and the recipient, and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication. Views are accurate as at the time of publication. Opinions expressed by individuals are their own and do not necessarily reflect those of ESLJ or any of its affiliates. The value of any investment may change and an investor may not get back the original amount invested. Past performance is not an indicator of future performance. This communication may not be reproduced, redistributed or copied in whole or in part for any purpose. It may not be distributed in any jurisdiction where its distribution may be restricted by law and persons into whose possession this communication comes should inform themselves about, and observe, any such restrictions.
ESLJ-290825-P2
Subscribe to our insights
If you are interested in our content, please sign up below and we will deliver Eurizon SLJ insights right to your inbox.
I consent to my data being collected and stored for the purposes of providing me information regarding my enquiry and related services. If you have any questions about your data please contact us at research@eurizonslj.com
Our Research
Our written research products aim to provide unique and orthogonal insights on key global economic and policy issues in a timely fashion.
