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

Thanks very much Matt, great to be here.

Matt Jones

After what's been a very complicated week for markets and also from a macro and geopolitical standpoint. Perhaps you can have a look into next week for us and talk us through the macroeconomic data points that you're going to be keeping an eye on.

Neil Staines

Yeah, thanks very much Matt. You know, after what has been a very complicated and at times dislocated market last week, we look ahead to the factors driving financial markets. Now, clearly the dominant factor remains the war in Ukraine, but I'll refrain from direct comments or prediction in relation to this. Rather, we focus on the macroeconomic data and events ahead. So firstly, the week kicks off with the European data, we have German retail sales for January, they are expected to rebound after a weak December. However, it'll be interesting to gauge the extent of that rebound and where we see the trajectory for the consumer going forward. Similarly, German factory orders a similar rebound expected there, but they're facing the same concerns over rising oil prices. Both of these will be important and gauging consumer and manufacturing sector rebounds, post Omicron, obviously, and against this, you know, a still very disrupted global supply chain backdrop. The data is for January, so it's likely that the current situation has put more strain on both the consumer and manufacturers through further sharp rises in energy costs and through further supply chain disruptions, as we're seeing now. And on this basis, the German trade data released this week highlighted a troubling drop in both imports and exports, resulting in a sharp drop in its trade surplus back to the levels at the trough of the initial COVID disruption, a worrying sign for Germany and for Europe again ahead of recent deterioration in the geopolitical backdrop. We also have Eurozone Sentix investor confidence for March, which may also be relevant to gauge in terms of its impact on sentiment in the region. And this index is historically pretty well correlated its GDP trends, so it will be something to closely watch out for there.

Next week, we also get the ECB, so at the last meeting, at the start of February, there was a stark implied pivot from the ECB intentionally shifting the policy debate towards policy normalisation and the need for policy optionality in the face of higher than expected inflation. Now, the knee jerk reaction of the market was to price two 25 basis point rate hikes for 2022, something that regular listeners or readers of the blog will note that we firmly disagreed with. However, recent developments and most notably the acute surge in energy prices, have clearly reined in expectation of growth and pushed up expectations of inflation, and that has really brought market pricing back in again. The March ECB will come with updated economic projections, but it's likely that recent events would have shifted the market focus from inflation to growth and fears of stagflation have started to appear. It is likely that the ECB announce a tapering of asset purchases next week, but it's also possible that the heightened uncertainty at the current juncture means that this may not extend beyond Q2. One thing is pretty certain amid what is likely a wider spread of opinions on the governing council, is that the terms optionality and flexibility will probably have a very high word counts.

And finally, while we move into the blackout period for Fed speakers ahead of the FOMC decision on the 16th, the data may do the talking. So we get the CPI reading for February, headline is expected to rise further to an incredible 7.9 percent with 6.4 percent core. We have a couple of thoughts, I guess, on this front. This week, Powell reaffirmed the Fed's intention to normalise monetary policy, expressing his view that the 25 basis points at the March meeting is appropriate and that all subsequent meetings in 2022 remain live and that rate hikes are the primary policy tool. So while 50 basis points remains possible, it's likely that the Fed would prefer a predictable 25 basis point hike pace throughout the year so as to avoid any destabilisation or unnecessary volatility. It's also likely that the Fed announced the pace of balance sheet runoff in March, though it is unlikely to start until later on in the year. Ultimately, and as we've discussed for a number of weeks now, growth is key to the global central bank reaction functions. More nascent or fragile growth backdrops such as in Europe will be disproportionately impacted by energy price rises and thus the Central Bank's less able to normalise. This likely maintains differentiation in terms of the yield differentials and in the currency space likely keeps the dollar and for more direct reasons, commodity exporters on the front foot.

Matt Jones

Thank you, Neil. A lot to be looking out for in the week ahead. And you mentioned your blog there. So for listeners who are not familiar with Neil's regular weekly blog, it can be found at Eurizionsljcapital.com/Insights. So between now and next week, we have the weekend, it is Friday. So what do you have your eye on for the weekend?

Neil Staines

Yeah, absolutely. Thanks Matt. You know, as far as sport is concerned, there is a full premiership schedule this weekend, with Liverpool at home to West Ham, the only team to have beaten them this year and Manchester City hosting Manchester United are the games to look forward to there. Outside of that, it looks like being a weekend to look forward to upcoming events. Next week's big hitting contests between Wales and France, now England and Ireland in the Six Nations. The week after that at the start of the new Formula One season and here in the UK, I'll be looking at the weather forecast and looking forward to the sun putting in an appearance at some point.

Matt Jones

That would certainly make a refreshing change. Well, thank you once again for joining us, Neil, and 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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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.
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