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 whilst markets are never simple, macroeconomic issues are never simple. I think the focus of next week is actually quite simple with Central banks back in focus, so perhaps you can just talk us through what you can be keeping an eye on in the week ahead.
Absolutely. Yeah. Thanks, Matt. Now, next week's macro backdrop will continue to be littered with geopolitical and economic uncertainties. But alongside this uncertainty, there are a number of significant data prints that will draw a close attention - US manufacturing and services ISM, and the ever important US payrolls, to name a couple. Now, these will be watched very closely as US economic momentum comes under greater scrutiny following the disappointing Q1 GDP print at the end of this week, but it is likely that financial markets next week or a game of three halves, as the RBA is expected to hike 15 basis points, half the usual increments, and the Bank of England and the Fed are expected to hike half of 1%. That said, the accompanying narratives may be very different.
First up, is the RBA and not so long ago, I personally would have been close to the front of the queue in pushing back against the significant rate hike expectations in Australia, as price pressures remained subdued, especially at the wages level and demand remains unclear amid more draconian lockdown restrictions. However, the reopening momentum, and more importantly, the commodity price boom since started this year has really changed the dynamic and this week's terms of trade data showing import prices up 5%. But export prices up 18% in Q1 are a good example of the commodity price boost to the current accounts. Now that is not to say that a 15 basis point hike next week from the RBA, as expected by the majority of participants, is a done deal acting ahead of the quarterly wage data, especially with core inflation in Australia only modestly above the 2-3% inflation target when it had been highlighted as such a significant factor in the normalization process is not clear. Nor is the tightening policy just ahead of the general election, monetary policy tends to try and avoid accusations and inference of political bias. Whatever the RBA does do, it's going to be significant interest to markets either way.
In the UK, the situation is also less than clear. Markets are pricing somewhere between 25 and 50 basis points for next week's MPC and with the delicate balance between growth and inflation risks, it's not impossible that the vote is split three ways, 0, 25 and 50 as different members apportion different probabilities to different risks. However, the narrative around growth risks will likely be the key focus for markets, concerns over the cost of living squeeze, including tax changes, not just inflation and how these changes affect the bank's ability to tighten policy in 2022, will be key to the debate. With a further squeeze in UK incomes expected later in the year as the next energy price cap expiry hits, this debate is likely only just beginning for the Bank of England and for markets.
And lastly, we get the Fed, now in many respects the FOMC is simpler or more straightforward, markets expect a 50 basis point hike to take the target rate to 0.75 to 1%. As per the clear and consistent use of the term expedited to signal the acceleration from a wide range of FOMC members. There has been talk of a 75 basis point hike, notably from St. Louis Fed James Bullard. But it's unlikely in our view as this is likely to cause more steep, more destabilizing implications for broader risk sentiment. The real focus of the Fed meeting will be on how long the expedited pace lasts, or how long 50 basis points remains the active policy increment. Markets are currently pricing close to four 50 basis point hikes this year, we will be more of the view that after a couple of front loaded 50 basis point hikes, the Fed likely returns to a more standard 25 basis point increments. All in however, with plenty to watch for next week with Central Bankers that center stage.
Absolutely all eyes on Central Banks this week and we look forward to seeing how things unfold. In the meantime, though, in the UK at least we've got a bank holiday weekend. So what have you got your eye on?
Absolutely. We have indeed. Yeah. So start off with a full premiership schedule this weekend after some wonderful European ties in the week, West Ham vs Arsenal likely the pick of the bunch on Sunday afternoon. The world Snooker Championships draws towards culmination with three out of the four semi-finalist from the so called Class of '92. As is still time for us old boys, yet perhaps. Formula One has a break ahead of the inaugural Miami Grand Prix the week after, but it's the first of the May bank holiday weekend in the UK. So we're very keen to find a barbecue invite somewhere. Sadly, the weather doesn't look like it's going to facilitate my desires in this regard.
Well, let's face it, since when do we need good weather for a British barbecue? Well, thank you very much for joining us again, and outlining your thoughts on the week ahead. I hope you do find that barbecue and I look forward to catching up with you again next week.
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