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.
Thank you very much Matt. It's great to be here.
So next week, we have a full complement really of of data and a continuation, I suppose, of divergent fortunes across regions. So what in particular are you going to be looking at?
Absolutely. That's right, you know, the big data focus next week is going to come from Wednesday's US CPI print, where analysts are expecting a further rise in headline to 8.8% year on year and a further dip in the core measure to 5.8% the third consecutive decline in the core inflation print in the US. Now, we will see what the data brings. But I'm still yet to be convinced that this is anything but a noisy process of topping out in the US inflation. What is perhaps more important is the underlying inflation dynamic, and how this ties in with the evolving economic narrative, or more specifically, market fears of recession, and market pricing through us curve inversion through equity valuations and through recent commodity price declines are all indicative of recent of rising recession fears. At the back end of this week, we heard from two of the more hawkish Fed members in Waller and Bullard both reiterating their calls for a 75 basis point hike at the July meeting, that's on the 27th and stating that the recession fears are overblown, and that there is a good chance of a soft landing in the US, respectively. Now this is much more in keeping with our US economic growth expectations or positive view of aggregate demand and economic progress. And also, of US assets, still supported by a strong private balance sheets, that's households and corporate, strong labor markets and decent wage gains, low corporate leverage and modest short term refinancing needs. Especially against a backdrop of US breakevens that suggest that the Fed reaction function is re anchoring inflation expectations if they were ever de- anchored in the first place, but overall, much more positive than central expectations on the US.
Next week, we also get the June data suite from China. While the Q2 GDP data will almost certainly show a zero COVID policy induced negative print, the reopening momentum in the economy means we likely see strong gains in industrial production and retail sales. Now policy support is also very likely to aid or more resilient economic growth for China in the second half of this year, caveating, of course, in the absence of a new COVID Wave. With government stimulus, while still supportive of property and infrastructure is likely to be increasingly focused on consumption going forward. But the underlying potential still likely remains at odds. With recent more recessionary correlated price action. In industrial metals. We retain a positive view on China into the second half.
And finally, as markets continue to price a high risk of recession in the US and China, we maintain a much more positive or constructive view relative to the outlook of the markets. However, in Europe, these roles are likely reversed. Over the past two weeks, since we last spoke, the most significant development or threat to growth has come from, not inflation, nor the tightening of financial conditions arriving from the central bank reaction functions to inflation. But from the deepening energy crisis in Europe. With gas flows through Nord Stream 1 at just 40%, having fallen sharply over the last couple of weeks, energy costs have started to rise again and some parts of Germany have reportedly begun quasi rationing of energy. Therefore, at the same time Eurozone nations are facing abroad real income squeeze, rising fiscal burden and that's made worse by the nationalization of energy companies across the board, rising borrowing costs and also rising energy costs. The situation really is a struggle across Europe at the moment. And while we are more positive than the consensus on the US, in the near term, we hold the opposite view in Europe. That is in terms of economic growth, at least. This week, we will therefore be very attentive to further energy developments, fiscal announcements and also any key hints from ECB commentary that shed doubt on a projected ECB rate path that against this backdrop looks increasingly very steep indeed.
Thank you, Neil. Certainly some key themes to be watching out for in the week ahead. Well, thank you once again for outlining your thoughts on the week ahead. And we 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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