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

So this week, we continue a theme which has been running for a while now, obviously, focusing on central bank action. So as you look into the week ahead, what in particular are you going to be looking out for?

Neil Staines

Yeah, absolutely. Thanks very much, Matt. You know, this week, we had important monetary policy meetings from the Fed, the Bank of England and the Bank of Japan, in the DM world. And even a shock 50 basis point hike from the Swiss National Bank as well as the number of EM central banks in action and all of this hot on the heels of the hawkish pivot from the ECB, the week before. The ECB have returned to the headlines this week with the acceleration of the readiness of a new tool to maintain the transmission mechanism of monetary policy. The difficulty being that monetary financing is not permissible under European law. So the structure of the mechanism to prevent intra Eurozone sovereign spreads widening is key. Most importantly, against the current dynamic, it highlights the direction of travel for European rates as fragmentation risks increase with a higher European rate curve structure. In the US, as we discussed at length in this week's blog, the key aim of the policy meeting was to regain control of the inflation narrative. And in doing so aim to head off fears that tail risks related to a more pernicious inflation surge, as a function of an inadequate or too slow fed reaction function. Next week, we get a large number of Fed, ECB and Bank of England speakers, and that's really going to be the focus, likely seeking to refine or clarify the monetary policy message with material consequences for rates and for foreign exchange markets.

Secondly, as financial markets continue to weigh the implications of inflation, and global central bank reaction functions on growth or aggregate demand, focus comes back to the UK this week with CPI and retail sales data, updating expectations of inflation and aggregate demand in the UK economy. This week, the Bank of England hiked rates by 25 basis points to 1.25% and reaffirmed its hawkish bias or hawkish credentials, and the primacy of its inflation mandate by stating clearly, it will act forcefully on inflation if necessary, and through the messaging of three MPC members who voted for a 50 basis point hike, dissenting against the governor, that's Haskell, Mann and the soon to be replaced Michael Saunders. Next week's retail sales data may help the MPC determine how far the real income squeezes weighing on household spending. A key question, but only part of the process as inflation is expected,under Bank of England modeling, to peak at a wallet clinching 11% In October. The Bank of England have stated that they are particularly alert to signs of more persistent inflation, exacerbating market focus on the net on next week's data. And indeed keeping yields firm and financial conditions tight in the UK, difficult path between inflation and recession for the MPC to navigate.

And then lastly, following on from successive hawkish pivots, in developed markets, in all but the Bank of Japan who are sticking to their maximum stimulus policy at least for now, sentiment will be key specifically in relation to future growth. Now, central banks are by their actions, likely reducing the risk of long term or disorderly demand driven inflation. But the further tightening of near term financial conditions will weigh further on consumers and business sentiment as inflation bites. Now next week, we also get global PMI data, which will give an update to services and manufacturing activity trajectories, composite measures are key as goods and services activity continues to be distorted by supply chains and by demand rebalancing, post COVID back towards services and foreign goods. So another fascinating week, fascinatingly complex week, you could argue ahead for markets and central banks remain the dominant focus. It's worth bearing in mind the statement from Fed Powell this week when he said "events and uncertainties of the past few months have increased the difficulties and have raised the probability that a soft landing for depending on factors we do not control."

Matt Jones

Thank you, Neil. Certainly a lot to be keeping an eye on in the week ahead from central banks. In the meantime, as we bask in the hottest day of the year so far in England, we're heading into the weekend. So what are you going to keep your eye on?

Neil Staines

Yeah, absolutely, thanks. It's an equally complicated backdrop for the weekend, whether to go outside and enjoy the sunshine, or to stay in and enjoy some of the incredible sporting activity we've got this weekend. Cricket England take on the Netherlands in the start of a one day series, ahead of the final test against New Zealand on Thursday, after it was an incredible finish to the second test, where England really did find their batting form that has been so much lacking over recent tests. In Formula One, they moved to Canada, bouncing is the buzzword to look out for. The new cars apparently are experiencing bounce as they travel at high speeds on the streets doesn't sound too wonderful. It certainly gave Hamilton a backache in Baku last week, and I should imagine a headache for the previous for the rest of the season. Amid the volatility of a challenger to the dominance of the PGA Tour. We also get this weekend final rounds of the US Open something I'm certainly looking forward to. It's from Brookline, Massachusetts, the venue of the 1999 infamous Ryder Cup. Very tough course only likely to get tougher over the weekend. A great challenge and seems to be great viewing I would imagine.

Matt Jones

Absolutely. Once again, something for everybody. Well, thank you, Neal, for joining us and for sharing 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".


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