of the week ahead


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 Jones, 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

I think it's fair to say it's been quite an interesting time of late in financial markets and I think next week is gonna be no different. We have a variety of data on offer both from a UK perspective and also US. So perhaps you can give us an overview of what you're gonna be keeping an eye out for in the week ahead.

Neil Staines

Yeah, absolutely. Thanks very much Matt. As you say another hugely volatile week for global markets as financial or banking concerns in both the US and Europe triggered memories of 2008, despite some very clear differences. Ultimately concerns about bank funding has driven markets to price higher credit risk. Which has ultimately led banks to tighten lending criteria to businesses and households and thus tighten financial conditions going forward. Developed market central banks now have to weigh these tighter financial conditions via the lending channel and their knock on implications for aggregate demand and therefore for growth, versus their prior intentions to tighten financial conditions through the monetary channel or through higher rates. This has led to huge volatility in rates markets, and as a topic we discuss further in this week's blog. Next week, there are a few areas that deserve our attention against this complex backdrop.

Firstly in the UK not only do we get important house price data from Rightmove for March on Monday. A very important CPI print for February on Wednesday and retail sales data for February on Friday. But we also get the Bank of England's rate decision on Thursday. Now, recent volatility has reduced market pricing for the Bank of England next week, but market still prices equal probability of unchanged versus 25 basis points. While headline inflation in the UK remains, it is already lower than the Bank of England estimates which itself projects inflation significantly below the 2% target at the forecast horizon. The data this week will have some bearing on the decision, especially the CPI print, but despite the fact that recent growth data have been better than expected, the tightening of bank financial conditions or financial conditions through the banking channel should balance the distribution of NPC member views around unchanged next week, from our perspective. Even in that instance, the decision and any commentary in the statement will be essential viewing.

Secondly, we get some more global data next week. Global flash PMI data for March at the end of the week will be a key gauge of the ongoing resilience of global demand and perhaps further evidence of the emergence of signs that cumulative global monetary tightening is impacting the real economy and not just the financial economy. Furthermore, we also get ZEW economic sentiment indicator from Germany where the balance between current conditions and expectations may be more telling against the current uncertainties. And lastly, we also get Japanese inflation data for February, expected to fall back somewhat, but either way, an important data point to inform the policy debate as the new governor, Ueda begins his stewardship of Japanese monetary policy.

And then lastly, and perhaps most importantly, we get the Fed next week. Now, despite the volatility in the financial space, markets are still 80% priced for a 25 basis point rate hike. Growth has held up well so far, at least. Inflation while clearly peaked is still too high, and some labor market measures show persistent tightness. However, US rates are already in restrictive territory. The extent and duration of the tightening of financial conditions is as yet unclear. And thus the reduction in requisite monetary tightening is also unclear. Furthermore, while cumulative monetary tightening has not yet dented growth, we continue to see non-linear downside risks to that growth, risks that will likely be exacerbated by the recent credit tightness. And of course, the cumulative tightening is the dominant cause of the US banking system difficulties and thus further rate hikes from the Fed risk extending or exacerbating that problem. For us, that means suspending the prospect of a rate hike in March and also possibly the accompanying SEPs and dots as a result, that's something to look out for that it isn't expected. All in all, a very busy week and further volatility expected.

Matt Jones

Thank you, Neil. A busy week ahead indeed. In the meantime, a busy weekend. Unfortunately, there's no rugby this weekend. So we can't really talk about that. But, what else do you have your eye on?

Neil Staines

Yeah, absolutely maybe from a Wales perspective my apologies, Matthew. Yeah, we have an abridged premiership schedule this weekend. Big games for South Hampton, Leeds and Everton. Patrick Vieira sacked on St. Patrick's Day, just further highlighting the struggle at the bottom of the premiership this year. Also, FA Cup action this weekend. Formula One moves to Saudi Arabia for the second race of the season Red Bull still looking well ahead of the competition. But for me it's all about the rugby. Scotland versus Italy, France versus Wales. Very tough game there for Wales. And Ireland versus England to wrap up this year's Six Nations. Very much looking forward to it.

Matt Jones

Absolutely. Joking aside, I'm looking forward to it as well. But thank you, Neil for joining us and for sharing your thoughts on the week ahead. I look forward to catching up with you again next week.

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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