of the week ahead

ECB's Rate Cuts: A Hawkish Move with Uncertain Path Ahead

The European Central Bank (ECB) implemented its first rate cut since 2019, reducing rates by 25 basis points. Despite this, it was a "hawkish" cut as inflation and growth projections for 2024 and 2025 were revised upwards. Market reactions were minimal, and upcoming speeches from ECB officials will provide further insights. The cautious approach aligns with recent views, suggesting potential opportunities for dollar weakness and support for bond and equity markets.

UK Economic Outlook: Key Data and Rate Expectations

The UK's economic outlook will be clearer with upcoming data releases, including unemployment rates and GDP figures. The Bank of England's next meeting, influenced by the general election, is crucial. Despite recent market disappointment with inflation data, continued progress towards target inflation is expected. This week's data will provide insights into real wages and economic trajectory.

US Labor Market and Fed's Next Steps: CPI and FOMC Focus

The upcoming CPI print is expected to drop to 3.4% for the headline rate and 3.5% for the core rate. The FOMC meeting will focus on Chairman Powell's insights on growth trends and future rate cuts, with key attention on the 2024 'dot plot' and the Summary of Economic Projections (SEP) for growth and inflation.


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

It's been a historic week for the ECB with the first rate cuts since 2019. How do we see the ECB action impacting sentiment and markets next week?

Neil Staines

Yeah, thanks very much, Matt. The ECB did cuts 25 basis points. However, it was something of a hawkish cut. The inflation projections were revised higher for 2024 and 2025.

And the growth forecasts higher also for 2024. And significantly in that instance, above consensus, there was also one dissent in favor of unchanged rates out of Austria. But ultimately the inference was that rates will be cut further. Even if the narrative has not attained sufficient confidence to declare that openly.

And that has been described within the official ECB rhetoric as maintaining optionality. Now, policymakers may see this as something of a success, however, because there was a very minimal movement in FX rates, in bonds markets, including spreads, and also in equities. Ultimately we'll look for some corroboration or otherwise from ECBs speakers. We'll hear from Holtzman to understand more about the dissent on Monday. But also from the Chief Economist Lane on Tuesday, Governor Lagarde on Friday, and find out really what that data focus entails going forwards. We explained this further in the blog, particularly in relation to the evolution of ECB rates and the uncertainty of the ECB to extrapolate.

So this more cautious ECB approach is certainly more consistent with our recent views, pushing back on the market expectations of rate divergence. Our blog explains this a little further. And we see this convergence that we're seeing now between US rates cuts expectations, and Europe among others, as a significant opportunity for dollar weakness going forward, whilst being supportive of bond and equity markets.

Matt Jones

So the ECB have cut, even if there's a lack of clarity around the forward rate path, does this mean the UK will follow?

Neil Staines

Let's let's hope so. Yes. So we don't get the Bank of England until the 20th of June. However, that meeting itself has been precluded likely by the general election. Regular readers will know that we pushed back against the market's recent disappointment on the last inflation print out of the UK, where headline inflation came down to 2.3% and it was expected at 2.1% and particular market disappointment was focused on the fact that services inflation bounced.

However, we pointed out that the base effects don't always come through in the one month in which we expect them to, we've seen some recent examples of that. And we need to wait until the 19th for the updated CPI print, where we expect there'll be a continued progress around that quest for inflation back towards target.

But this week we do see the unemployment rate published on Tuesday, along with average hourly earnings, and we'll get some gauge as to whether or not real wages continue to increase. And also on Wednesday, we get GDP for April and that'll give us some gauge as to the current short-term trajectory of the UK economy ahead of the important general election. There's no commentary from a MPC speakers as we move into the blackout period. But still a big week for the UK.

Matt Jones

And how about the US so after an important week for the US labor market, What are we looking out for from the Fed and US data next week?

Neil Staines

Yeah, absolutely. Matt. It's a, it's been a huge couple of weeks for the US, and we know that we've seen increased in labor supply due to the well-publicized figures around immigration, and last week we also saw improvements in the demand dynamics for the labor market, through the JOLTS figures, released showing lower demand for labor.

So both sides of the supply and demand curve there offering support for labor market or reducing the tightness in that labor market, and that should be a positive for price action going forward. Certainly if we add to that, the fact that we've seen further evidence of slowing consumption in the data, and forward-looking consumer expectations from equity earnings results.

Next week, we do get the CPI print, the all-important CPI print and we're expecting that to dip further to 3.4% on the headline rates and 3.5% on the core. And that will be key to maintaining recent trends. As you infer, we also get the FOMC next week, Matthew, and that'll be a huge focus for next week. Not for a rate cut as we don't expect that, but certainly around Powells commentary, and the statement emphasis on the growth dynamic that recent slowing and consumption that we've witnessed through a number of recent data events and how that plays out. And perhaps more importantly on the dots where the central expectations of the FOMC members fall for that 2024 dot. Does it price two cuts, or does it price just one going into an important period for the data. We'll also we've closely watching the SEP projections for growth and inflation, all of those seeking to provide greater confidence for the Fed that inflation is coming back towards the targets, and we can begin rate cuts in earnest.

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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