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 we're back after our Jubilee hiatus. I don't know about you, but I'm not sure I could stand to stomach another cucumber sandwich. But we're back. And we have a nice spread of data this week from around the world. And I think the focus really is going to be on the evolution of the inflationary reaction function from central banks. So as you look into next week, what are you going to be focusing on?
Yeah, absolutely. Thanks, Matt. As markets digest this week's ECB decision, formally ending its QE program and embarking on a normalization journey, as opposed to just a step as Lagarde was clear to point out, central banks and their respective reaction functions remain front and center next week. We outlined some further thoughts on the ECB in this week's blog. But the narrative was clear the decision unanimous. A series of rate hikes are in train to address the above target inflation throughout the forecast horizon. A reaction function understandable in light of the ECB singular mandate, that is specifically inflation, and the underlying market dynamic leads us to a very few clear focal points for next week. Next week brings the return of the Bank of England while it's not a quarterly inflation report month or a monetary policy report month in new money, and thus, no new forecasts or indeed press conference. The action of the Bank of England and the accompanying statement will be closely watched. Governor Bailey is expected to propose a 25 basis point rate hike at the meeting. And while ahead of the previous meeting, we highlighted the potential for a three way split, ie votes for unchanged, 25 and 50 basis points on the uncertainty of the growth and inflation trajectories, this time round, we're inclined to see more unity.
Firstly, the fiscal boost announcement by the Chancellor a couple of weeks ago to address the cost of living squeeze likely puts paid to the unchanged by us and some of the members. However, the persistent global supply uncertainties and broadening inflation pressures, meaning the 9% annual CPI print in April is unlikely to be the top, likely keep a hawkish tone to proceedings. At least in the near term that is and a 25 basis point hike to 150 (one and a half percent) in the UK thus seems likely.
Secondly, sentiment continues to be a key driver of markets in the near term, heightened sensitivity to more negative economic developments amid a more audible commentator recession narrative mean a continued acute focus on COVID cases in China, the war in Ukraine, and obviously, inflation are three dominant shocks, prominent in different global economic regions. Markets likely remain more defensive while we retain a more positive outlook in general, more so in some specific cases. Data evolution therefore and news headlines continue to be a key focus. And on that front, the suite of China data for May will be very closely watched least for signs of bottoming out and the reopening from the zero COVID lockdowns that we've seen. In the UK retail sales for May an employment and industrial production for April will be a key focus alongside Germans ZEW.
Then lastly the dominant focus for next week, given the importance of the market sentiment and global economic evolution on the central bank reaction functions is the fed. The FOMC is expected to raise rates by 50 basis points to a 1.25 to 1.5% target range. However, the dominant focus will continue to be around the fear of persistent or a more pernicious inflation, and thus, a more growth unfriendly fed reaction function. Focus therefore will not just be on the rate announcement and the accompanying statement or indeed the press conference, but also on the updated summary of economic projections from the Fed and the rate forecasts or dots. The ECB meeting this week, will retrospectively be viewed as a milestone, the announcement of an effective end to the negative interest rate policy within the Eurozone. But the Fed narrative likely continues to dominate global sentiment.
Thank you, Neil, a lot to be looking out for in the week ahead, in particular, as we turn our eyes towards the US. In the meantime, we have the weekend and I think we're pretty much spoilt for choice, but what are you going to be watching for?
Absolutely, yeah, thanks, man. Golf to start with at least, 17 PGA players playing in the inaugral $25 million Saudi funded LIV golf Invitational the weekend, they have now been suspended by the PGA. So not only is there big money but also big headlines. I'm not sure that's what the PGA wanted in the first place. Formula One moved to Baku for the Azerbaijani Grand Prix that should prove to be very interesting indeed. In football, we get a rerun of the euro 2020 tournament final England versus Italy on Saturday night, that should be great. But for me, the main focus is going to be the second test from Trent bridge, England versus New Zealand, England looking to build on the Lord's victory and fix some of the batting issues that concern them against the world champions at loss.
Fantastic. Well, thank you once again for joining us, Neil and for outlining your thoughts on the week ahead. We look forward to catching up with you again next week. It's been a pleasure.
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