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 Jones, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. Great to have you with us again.
Hi Matt. It's a pleasure.
So looking to the week ahead, this week, really, central banks come back into focus in a larger way. So as you look into next week, what in particular are you going to be focussing on?
Yes, absolutely. Thanks, Matt.
I think it's an interesting start to the week; as we mentioned last week it begins with Labor Day and I think that has important implications for the mindset and psychology of markets. It may even lead to some of those participants working from home to switch the shorts and t-shirt for perhaps not a suit and tie, but trousers and a shirt.
Now, the first focus, as you say, central banks are back in focus, the RBA [Reserve Bank of Australia] on Tuesday and the ECB [European Central Bank] on Thursday. Now, the RBA faces a tough decision on whether or not to reduce the pace of QE [quantitative easing] purchases, as they had indicated in previous meetings, in the face of stronger than expected Q2 GDP. Very impressive first half growth in Australia, but continued Delta wave restrictions threaten a more pedestrian pace of recovery in H2. Personally, I would err on the side that they do reduce purchases, but it's a close call.
The ECB will be the main focus of the week. Expectations are firmly behind upward revisions to growth and inflation in the staff projections, and with that, the market expects a reduction in the pace of PEPP purchases for Q4. Now, there were clearly different views in the Governing Council in July, and with further signs of divergence on growth, debt, investment and even inflation trajectories, we expect the Governing Council debate to remain very heated and Lagarde's commentary, therefore, very delicate. We do expect a reduction in the PEPP purchase pace in Q4, but we don't see this in the same way some of the markets do. The recent debate framing ECB policy as a tapering before the Fed [Federal Reserve], I think is a bit misleading. ECB QE is flexible across time and jurisdiction, but it's capped at a preannounced envelope total. So the fact that it's already capped at a level of stimulus provided the economy means that tapering doesn't have the same impact as it would - or as it does - in the US form of open ended QE stimulus. Fed QE is open ended, and thus any curtailment of the pace of purchases has a significant impact on the expected value of total assets purchased and the stock of QE assets, essentially the gauge of QE quantum. Either way, we expect Lagarde to deliver a forecast revision with caution, and that any reduction in the PEPP purchase pace will be done at least with an attempt to be suitably dovish.
Secondly, we come back to the data focus, also predominantly back to Europe and China this week. Eurozone Sentix Investor Confidence is out on Monday and that historically is pretty well correlated to Eurozone GDP, so that will be an interesting focus. On Tuesday we have German ZEW for September and the China trade balance followed up by China total social financing data on Thursday. Now, in Europe, there have been some recent signs that the data is rolling over. It's likely that Eurozone reopening rebound growth has peaked and that we sequentially head back to an equilibrium level of growth, ultimately that is significantly lower than that of the US. And in China there's a very complicated mix of targeted policy, structural reforms, social engineering and even deleveraging, and that's in addition to covid restrictions that have impacted the data in the near term. But ultimately, we see this as a transitory negative for China growth. But watch for stimulus and support measures and the knock on implications across important downstream markets such as within Europe.
And then lastly, we'll be very closely watching the policy impact. We'll keep keeping a close eye on the process for the renomination of Powell as Fed Chair for a further four year term. We see Powell's recent rhetoric and actions - particularly along the lines of the doveish market interpretation of the Jackson Hole testimony - as likely influenced by this process and the more dovish leanings of the alternative front runner, Lael Brainard. Now, a new contract may well give Powell a new, more hawkish lease of life, and perhaps this may be timely ahead of likely improvements in Delta progression and global supply chains in Q4. Interestingly, there was an attempt by progressives in the US House to condemn the performance of Powell on the basis of climate change credentials. However, with them failing to agree on an alternative that likely strengthened Powell's position. And then further, just lastly on the US front, progress on US fiscal stimulus may not be quite so clear, with one of the middle ground Democrats asking for a pause in a three and a half trillion stimulus programme. And so lots to watch for there in the US also.
Thank you, Neil. A busy week ahead indeed. In the meantime, though, as we look to the weekend, again, to be honest with you, absolutely spoilt for choice. I know what I have my eye on, but what are you going to be looking at over the weekend?
Absolutely. Yes, thanks Matt. Again, phenomenal, really. We have the final medal events and the closing ceremony of the Paralympic Games - another extraordinary success for Team GB. The culmination of the third England-India test from the Oval, currently standing at 1-1. That's a very close fought match after a stunning win, but likely a one off win from England at Headingley. And football internationals are back with World Cup qualifiers, the second of a three match series which sees the home nations all in action; Scotland-Moldova, Republic of Ireland-Azerbaijan, England-Andorra and Belarus-Wales. Perhaps even the pick of the weekend's bunch of games is Switzerland-Italy, after a disappointing draw from Italy against Bulgaria. Also Formula One and continuation of the Hamilton/Verstappen head to head. Verstappen's. Back on home soil at the weekend after being awarded a win in a very bizarre Belgian Grand Prix last week based on qualifying and very minimal racing, if any at all.
Absolutely, a packed weekend. I hope you enjoy it and I look forward to catching up with you again next week.
Thanks very much, likewise Matt.
Thank you for joining us for "The Long and Short of the Week Ahead". Further insights are available on our website eurizonsljcapital.com/insights. We look forward to you joining us again next week for more insights into macro-economic events and "The Long and Short of the Week Ahead".
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