In this week's Podcast
- Recent Market Volatility and Forward-Looking Implications
- European Data and Sentiment
- Broader Developed Markets' Focus
- US Market Focus
Recent Market Volatility and Forward-Looking Implications
- Significant volatility due to Fed pivot, weak employment report, and recession concerns.
- S&P's volatility index (VIX) surged to 65 from 14.
- Central case: continued disinflation and growth moderation, positive for risk assets and duration, negative for the dollar.
European Data and Sentiment
- Focus on upcoming ECB minutes and splits within the governing council.
- Important releases: negotiated wages, global PMI data, consumer confidence, and inflation expectations.
- Dominant macro development remains dollar negative and Euro positive despite regional uncertainties.
Broader Developed Markets' Focus
- Australia: RBA minutes suggest current policy is sufficiently restrictive.
- Sweden: Riksbank expected to cut rates by 25 basis points, with more cuts likely this year.
- Japan: CPI data, Governor Ueda's testimony, and political changes with Kishida stepping down as PM.
US Market Focus
- Democratic Convention: Insights into the policy directions of candidate Harris.
- Q2 earnings from Target and Macy's crucial for consumer strength assessment.
- FOMC minutes and Powell’s testimony at Jackson Hole for guidance on impending rate cuts.
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 jumping straight in and perhaps addressing the recent market volatility that we've seen over recent weeks. What are your thoughts in reaction to the recent moves and their forward looking implications.
Neil Staines
Yeah, thanks for that. Great question. The last couple of weeks have been very significant in terms of volatility. Following on from what was essentially a Fed pivot. Weaker employment report and also manufacturing ISM that sparked fears of a US and essentially global recession. Now the epicenter of the Vol spike where we saw the VIX or the volatility index for the S&P rising to 65, from floating around the 14 level prior to the event, happened around Monday the fifth. And as we discussed in this week's blog, our central case, however remains broadly unchanged and that disinflation and growth moderation, but not negative growth wi ll continue to have implications positively for risk assets positively for duration and negative for the dollar.
Matt Jones
Now it's been a quiet couple of weeks for European data and monetary comment. How's sentiment been evolving, and what are we focused on in Europe this week?
Neil Staines
Yeah, thanks. It has been very quiet for, we haven't heard much from the ECB over the last couple of weeks. But we do get a chance to focus back on Europe this week.
With the ECB minutes on Thursday of this week. And there's going to be a great deal of focus on the splits within the governing council. And now the main message from the ECB is that policy will be driven by the assessment of inflation, the dynamics of underlying inflation and strength of policy transmission. And that's likely from our perspective to see rate cuts continuing in 2024. Markets are pricing around 65 basis points, and we think that the broader ECB assessment of the path of inflation brings around three rate cuts for the remainder of this year. We also get negotiated wages, that's an ECB metric, for Q2 and that will be critical for the ECB in gaining confidence in that inflation path. And again, a lower print there kind of points to further rate cuts. We get global PMI data. Now we saw a drop-off in the ZEW expectations component earlier on this week, and so the PMI's, will be an important gauge for the trajectory of sentiment, especially following the recent episodes in terms of volatility and concern about the state of the trajectory of the global economy. And we also get consumer confidence and inflation expectations again. That'll be important. Now as we see it, it will be more important for relative equity performance in the European space, because ultimately we continue to see the dominant factor of the macro development being dollar negative and therefore by default Euro positive, despite the uncertainties in the region.
Matt Jones
And with monetary policy across developed markets still very clearly a dominant focus. What are we looking out for next week, more broadly?
Neil Staines
Yes. Quite right. Monetary policy is still very much the dominant focus. From a monetary policy perspective, the balance of risks has clearly shifted from inflation to growth in DM. And there are a number of events next week that we will be looking out for more globally in the DM space to pick up that theme. In Australia, next week. We get the minutes from the RBA, now during the last meeting the RBA stated that they actively considered a rate hike, however, this week, in parliament, governor Bullock argued that we are at our peak in policy, and that that policy is sufficiently restrictive and therefore suggestive of the fact that perhaps monetary policy has moved on and therefore those RBA minutes, maybe a little bit out of date. In Sweden, the Riksbank are expected to cut by 25 basis points and the market is pricing around a hundred for the rest of this year, so it will be be interesting to see how we gauging this growth and inflation trade off in the European periphery. In Japan, we get CPI print and we get a governor Ueda's parliamentary testimony on Friday.
However politics threatened to take over in Japan with the recent announcement that Kishida will not stand in the upcoming LDP elections and therefore is standing down as prime minister. Another one important candidate to look out for Takaichi, who is more aligned with Abenomics and maybe a little bit more of a counter to bank of Japan rate hikes going forward.
So that'll be the policy focus in Japan going forward. And we also get from the UK, we get Bailey speaking at the Jackson hole symposium on Friday. Now we've had better data on the whole, this week from the UK, but still for us, there are clear signs that policy is too restrictive at the current level, and ultimately Bailey's discussion at the Jackson Hole symposium will be a very important barometer of the bank of England's reaction function going forward.
Matt Jones
I suspect, however, the main focus will be the US. So what should we be looking out for there next week?
Neil Staines
You suspect correctly I imagine Matthew. Yeah, certainly. For the first half of the week next week we get the Democratic convention, so we may get more understanding of the policy intentions of presidential candidate Harris. We also get Q2 earnings from a couple of laggards in the earning cycle. Target and Macy's. It will be a big focus, particularly as market emphasis on the consumer and the strength or relative slowdown of that consumer. And we also get the FOMC minutes on Wednesday. Perhaps a little outdated, especially given that the big focus on the week is going to be Powells testimony at the Jackson hole symposium.
Now, historically this has been a backdrop for announcements of significant policy evolutions or pivots, and we expect this time more explicit guidance on impending rate cuts. A lot to live up to with 93 basis points of cuts priced by the market for this year. Either way, you might describe this week as broad, but an intense focus nonetheless for 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 week.
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