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, Neil. Good to have you back again.
Hi Matt, good to be back.
As we look at the week ahead and we look to the data points and the macro themes that are driving markets, it would appear to be growth related themes that we're looking at this week. Could you perhaps outline your thoughts on the week ahead?
Absolutely. I think this week has been a very complex week for global financial markets as resurgent fears of covid - specifically the global spread of the Delta variant - combined with and exacerbated fears of slowing growth. Overall, we think it's very important not to confuse a change in the second derivative of growth with something more sinister. By that, I mean we have clearly seen a rapid pace of re-opening momentum driven by largely base effects from being very close to being more open. And I think that's important. We continue to see global growth, and in particular US growth, maintaining above historic trend or equilibrium growth, even if sequential growth readings continue to decline. Nowhere is the expression of growth risks more consequential for global assets than the US yield curve. And we continue to see the level and shape of the US yield curve as a dominant barometer of global sentiment. It certainly was heavily impacted in the middle of last week, along with equity markets. Whether this is a representation or an estimation of r star or the terminal rate, as some are leading us to believe, we think is less likely; we're more inclined to focus on capital flows that are driving this lower yield curve into the world's safe safe-haven, positive yielding asset in the US Treasury market and the substantial role that that plays. As such, we don't see it as inconsistent to maintain a strong view of underlying US growth, given the flatness and low levels of the long end of the US yield curve. To that end, I think there are three important events:
1. Predominantly, on Wednesday the focus will move towards the FOMC. But with no updated projections and recent Powell testimony stating that we still have a ways to go until we reach substantial further progress, expectations for next week's FOMC meeting likely remain relatively low. However, following the recent market focus - or concerns - on growth, the narrative surrounding the underlying economic activity, particularly at the consumer and labour market levels, are going to be a core focus. We expect a continued positive growth communication as per the June meeting, but we will keenly watch this nonetheless.
2. Then, as a validation of the Fed rhetoric, we get US Q2 GDP on Thursday and on Friday, PCE inflation for June. These have been the dominant themes of late. Now the Q2 GDP reading is expected to slow to show a further acceleration to 8%. Now, it's likely that Powell's words in the FOMC shake the focus or interpretation of this data. Is it current dynamism or is it retrospective strength? I think that's important, but we're inclined to remain positive on US growth. Friday, inflation comes back into focus with PCE, and until a week or so ago, this was the market's dominant fear - runaway inflation. PCE - the Fed's preferred inflation gauge - is expected to tick up again in June, but we still think that's likely still driven by temporary or transitory factors, but will remain a key focus.
3. Then lastly, back to Europe, we get Q2 GDP from the Eurozone and consumer confidence across Europe, as well as the IFO sentiment for July. I think this will be an interesting focus for Europe next week following the ECB last week; how businesses and consumer confidence interacts with the events that we've seen over recent sessions against recent global growth concerns, against recent specific China growth slowdown returns and how that's impacted with being the key market for a lot of Eurozone exporters. And also the recent acceptance across the Eurozone that the fourth covid wave driven by the Delta variant is in trend. So I think that's very important. IFO index on Monday will also give us a clue as to how this feeds through into business sentiment and then a raft of consumer confidence measures at the national level throughout the rest of the week. GDP on Friday will be very keenly watched. I think all this fits in with an extreme focus on the Euro/Dollar cross that we will be paying very close attention to.
Thank you, Neil, so certainly lots to be looking at and perhaps to paraphrase Ian Dury and the Blockheads - reasons to be less fearful.
So as we look into the weekend, away from markets, perhaps onto to some sporting excitement, I know what I've got my eye on, but what are you going to be looking at this weekend?
Absolutely, another spectacular weekend of sport, Matt. You know, we really have been spoilt this year. First up over the weekend is the long awaited - and certainly feared it wouldn't go ahead due to covid in both camps - the Lions test against South Africa promises to be a very big hitting, high paced event. And then obviously the Olympics. It may be a year late, there may be no fans, it may be completely the wrong time zone, but I'm sure it will hold a lot of attention and I can't wait personally.
Some very exciting sport to be watching over the weekend. Well, thank you once again for outlining your thoughts on on the week ahead and I look forward to catching up with you next week.
Likewise. A pleasure. Thank you.
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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