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.
I think it's fair to say, looking to the week ahead, it's going to be quite a big week for macroeconomic events and data. So without further ado, Neil, what is it that you've got your eye on in the week ahead?
Absolutely. Thanks very much, Matt. I think the most significant event over recent weeks was the June FOMC and the hawkish pivot from the Fed that essentially has changed the backdrop a little bit - certainly from a foreign exchange perspective. We saw what was a surprise relative to the consensus view, and that is that the Fed is intentionally behind the curve; a surprise relative to a previous Fed narrative but for us, not a surprise relative to the data or the US growth backdrop. But this week, we get the minutes from that meeting. They're going to be very closely scrutinised for consistency with the market's response at the time, and the more hawkish narrative - not just the dots, upgraded growth forecasts and rate expectations going forward, but also the press conference where Powell was notably more confident about the economy. That is in stark contrast to some of his predecessors, where any positive news was played down in some press conferences. So we think that we may have got to the point of sensitivity on inflation for the Fed and the FOMC, certainly significantly above target, and even in the context of the new flexible average inflation targeting framework, it certainly intensified the focus on the Fed's reaction function. So inflation and any narrative around achieving, or the period at which they expect to achieve, on the labour market goals as well. Going forward, substantial further progress on inflation is arguably met, and we see the focus shifting toward the macro data and in particular labour market data. And this whole debate, if you will, intensifies market focus on the dollar and the upside case that we have made for a long time certainly seems to have played out in the near-term, and we continue to like that.
On Monday, we get the services PMIs globally. Now in developed markets, last week we saw a slight moderation in the manufacturing PMIs, but still very strong levels, some kind of plateauing at decent levels. In emerging markets, however, there were some signs of a resurgence of covid waves that appeared to impact sentiment in this regard. And this divergence may be more pronounced in the service sector.
On Tuesday, we get German ZEW, and after some signs - tentative signs - we'll say that Germany's inflation has peaked. I think there is a wider sense that this could shift the focus of ECB policy. Now, particularly in relation to where we are in the US, where policy seems to be being drawn forward - and a more hawkish fed - we may be in a scenario where we could even see a topping out of inflation pressures in the near term, weighing on the ECB's narrative and more of a focus on the inflation shortfall that we see at the forecast horizon, which would indeed argue for further accommodation. It's interesting to see how this plays out in terms of German business expectations in the ZEW this week - particularly, has the rebound in growth momentum also peaked for this point? And that has particular interest in context of a more muted China slowdown, a core export market.
Tuesday also sees the RBA meet, and of late we've seen stronger economic data, and that has led the market to begin to price in rate hikes around the boundary of the yield curve control guidance area at that three year point. This is very interesting because it likely puts a lot of pressure on the RBA to respond to this kind of Fed hawkishness, and either maintain or pull back from their commitment to maintaining rates at 0.1% out to three years.
And then finally in the UK, we get monthly GDP next week on Friday. After a huge 2.3% month on month reading in April, we're expecting a 1.9% number in May. This is shaping up for an incredibly strong Q2. Perhaps further progress from the England team in the Euros could realise the departing Bank of England Chief Economist Andy Haldane's prophecy of a dangerous moment for inflation.
Thank you, Neil. I think outside of inflation and looking to the weekend and sporting activities, I think there's certainly room for some dangerous moments there, too. What in particular have you got your eye on over the weekend?
Yes absolutely, it's going to be another fascinating weekend, certainly from a sporting perspective. The start of the Lions tour of South Africa in the rugby should be a fascinating affair for a number of weeks to come. I don't know if I'm supposed to be impartial or not, but come on, England, as the quarterfinals of the Euro Championships get underway this weekend. We also have the Austrian Grand Prix and Verstappen looking very good in early practises, that's going to put a lot of pressure on Lewis Hamilton. And finally, Wimbledon middle weekend with far more Brits than we usually get.
Thank you, Neil. I think given the circumstances, you can be as impartial as you like. Thank you for joining us once again and outlining your thoughts on the week ahead.
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