of the week ahead

Transcript

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

Looking into next week, there's there's not really a lot of data to focus on. So I think it's fair to say it's going to be more around the importance of the underlying narrative. So perhaps you can just talk us through what you're going to be watching out for in the week ahead.

Neil Staines

Yeah, absolutely. Thanks, Matt, you know, with with another relatively light data calendar, as you say next week, on the last week, in another complicated month for the global macro economy. Geopolitics, COVID progress, as well as sentiment and positioning are likely to be the dominant drivers of markets. However, there are a few things we will be keeping a close eye on. Firstly, and as we discussed in this week's blog, the Fed narrative around inflation and market sentiment around the threat of a renewed or more pernicious inflation prospects are key. However, we are sympathetic to the view that markets are keenly priced for a Fed tightening, that there is enough to bring demand and supply back into balance. In other words, the Fed tightening or the Fed tightening cycle is fully priced. Of course, there are risks to a more destabilizing inflation trajectory, but that increasingly appears not to be the core market view. The implications of this are very interesting. In the currency space, a fully price Fed likely suggests some narrowing of monetary differentials, or at least no further widening and at the margin, this should be a modest negative for the dollar. For risk assets a fully priced Fed likely shifts the directional bias of tightening financial conditions. In part this is also a self fulfilling as equity and credit valuations are also reflected in those financial conditions. Thus, sentiment and price action in the equity and credit space next week are very important and as such, we'll be watching very closely.

Secondly, a key focal point in this regard will be the minutes from the May FOMC released next week. At the meeting, the Fed unanimously raised rates 50 basis points to 0.75 to 1% target range, and emphasize both the strength of the labor market and the strong underlying momentum in the economy. As well as the household and business balance the strength and the ability of the economy to withstand the Fed tightening. Powell also pushed back against the prospect of a 75 basis point rate hike now or in the future, which is in turn help markets reach a more stable range for the US yield curve in pricing the Fed tightening cycle. Interestingly, there was also a modest focus on the implications of the Ukraine war and China COVID policy on supply side factors, factors which monetary policy has little influence over hence, it is likely that the Fed are focused on a smaller number or a component of the current eyewatering inflation levels. In the minutes, we will be closely watching for any more positive views or inclination towards a potential 75 basis point hike in the future. Special concerns or areas of concern for growth, and indeed, labor market strength or prospects for increased participation, which will have big implications for that narrative. In any event, enough to keep us busy on Wednesday evening next week.

And then lastly, next week, we get the global flash PMI data for May. Interestingly, the PMI data has held up very well over recent months, notably in the Eurozone, with fears of Ukraine and China related supply disruptions, and of course, fears of the impact of the real wage shock weigh on wider sentiment. But it's also important not to forget the concurrent positive impact of COVID reopening and, of course, the fiscal boost in Europe, not to mention historically low levels of unemployment. In fact, the lowest levels ever. Half of that level that was seen during the eurozone crisis. With significantly higher participation rate than than the US at this stage, the situation is arguably increasingly positive despite the complicated backdrop. Now the PMI data will be closely watched. And it's certainly possible that wider Eurozone sentiment and data catches up to the PMIs going forward. Not PMIs catching down to sentiment. A backdrop not as bad, perhaps with some markets imply.

Matt Jones

Thank you, Neil. Whilst it's a data light week, there still plenty for us to be keeping an eye on in the week ahead and in the meantime, we have the weekend. What have you got your eye on?

Neil Staines

Absolutely plenty to go round again this week Matthew with Formula One action has to Barcelona for the Spanish Grand Prix. There we're still being held back by the Mercedes speed. And it looks like Red Bull and Ferrari on the podium places again, perhaps even three in a row for Max.

Secondly, the golf PGA championships from Southern Hill after a cracking start from Rory McIlroy on day one looks like it's going to be an exciting weekend. And then finally, it's the final day of this year's Premier League. So Manchester City is titled to lose. But Villa can still have a say in this. There's also Europa League and Champions League champions league spots to sort out as well as relegation and survival. So lots of simultaneous action on Sunday.

Matt Jones

Absolutely. Something for everybody. Well, thank you for joining us once again and outlining your thoughts on the week ahead. 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".

Disclosure

None of the contents of this document should be understood as constituting research on investment matters, or as a recommendations, advice or suggestions, implicit or explicit, with respect to an investment strategy involving the financial instruments discussed, or the issuers of the financial instruments, nor as a solicitation or offer, nor as consulting on investment matters, of a legal, fiscal, or other nature. All the companies of the Intesa Sanpaolo Group, its administrators, representatives, or employees, decline any responsibility (fault-based or otherwise) deriving from indirect damages potentially caused by the use of this communication or its contents, or in any case deriving in relation to this document, nor may they be consequently held liable for any of the above. The information provided and the opinions contained in this document are based on sources considered reliable and in good faith. However no declaration or guarantee is offered by Eurizon SLJ Capital Limited, explicitly or implicitly, on the accuracy, exhaustiveness and correctness of the information, and there is no guarantee that results, or any other future events, will be compatible with the opinions, forecasts, or estimates contained herein.

Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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