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 having taken a break, hiatus for Easter, I think it's fair to say that markets have not done the same. So as you look into the next week, what are you going to have your eye on?
Absolutely. Yeah, you know, after another complex and uncertain week for financial markets. Next week is another week, where the calendar is fairly light in high profile data but there are a couple of developments and we'll be watching very closely. Now, firstly, the Central Bank narrative continues to be the core driver of market and rate pricing, and thus, wider risk sentiment, certainly this week. Now, both the US and the UK monetary policy makers go into their respective blackout periods ahead of the FOMC on the fourth of May, and the Bank of England on the fifth. But markets will reflect on the commentary of both Powell and Bailey in the past week with respect to rate hike pricing, and any geopolitical and economic developments. At the IMF Spring Meetings, Powell was as clear as possible, that 50 basis point hike in May should be expected and he stressed it was absolutely essential to restore price stability, and the Fed will not count on supply side healing to rein in price pressures. Essentially, while this week, there was much airtime on 10 year real yields approaching zero, the focus will be on raising the front end real yields currently still in very stimulative levels, and that will be the focus of the FOMC. Now the advantage that the US has, is being its growth, and now the labor markets and underlying demand, boosted in some part, at least by the COVID Rebound remained very strong in the US. In the UK, however, the situation is more complex and also this week, Bailey's commentary was much focused, he showed much more uncertainty about the UK policy outlook and emphasized the fine line between inflation and the economic outlook. On the one side, real income shock is a concern for growth, yet the inflation target remains a critical anchor for the Bank of England. Now amid this difficult conflict, Bailey expressed a nervousness about giving forward guidance, in stark contrast to a market there's now pricing 160 basis points, or more than six 25 basis point rate hikes this year.
Secondly, on the data focus, we swing back towards Europe next week. Now over recent months, there has been much focus on the absence of wage inflation in the official data, and that's damped, the ECBs reaction function. However, there's also some suggestion of the absence of the expected negative shocks from the Ukraine situation from the European data. Now, Eurozone forward looking PMI data for April suggested accelerating services and a surprisingly resilient manufacturing activity at the headline level at least, despite the war and the implications for complex manufacturing supply chains. Perhaps it's not surprising that we've seen a near uniform hawkish change in the ECB narrative over recent days. Therefore, as we know in this week's blog, and next week's IFO and CPI readings for April, as well as the more retrospective Q1 GDP readings for the region will be a key focal point for the evolution of the ECB reaction function and the market pricing with the June meeting now the critical juncture for monetary policy in the ECB in 2022.
Lastly, the monetary policy consistency or inactivity from the Bank of Japan, has kept the Yen and the Bank of Japan largely out of the headlines for a long time now. But as inflation and subsequently global central bank reaction functions have shifted more hawkishly than almost everywhere else. The Bank of Japan's position has become more of an outlier, and the Yen has suffered accordingly, as spreads wide and against it. The Bank of Japan and the MOF rhetoric has stepped up dramatically of late in defense of the Yen and markets have so far been wary of the 130 level. But the Bank of Japan meeting next week must walk a narrow path between maintained accommodation to foster this self-sustained price stability that they seek. But at the same time, the narrative can't encourage further Yen weakness. We may see a widening of the Bank of Japan. As your control target band, but and that may give a reprieve to the Yen. However, if not, the prospect of currency intervention may come a little closer.
Thank you Neil. A lot to be looking out for in the week ahead. In the meantime, we have the weekend. What have you got your eye on?
Absolutely. Yeah, we have a full premiership scheduled this weekend as the season draws into its final stages. Arsenal vs Manchester United, who have just signed a new manager in Ten Hag. He may indeed have a tougher job than the Bank of England at this stage. There are also three derby matches Liverpool vs Everton, Chelsea vs West Ham and Tottenham vs Brentford. We also get this year's World snooker Championship from the Crucible, often running this weekend, and at a slightly faster pace, even if rocket Ronnie is favorite in the snooker at a slightly faster pace the Italian Grand Prix, Formula One moves to Italy with the newfound performance of the Ferrari this season, we expect to see a sea of red behind Charles de Klerk and Carlos Sainz, Verstappen likely to feature somewhere, but Lewis is likely still off the pace for that.
Fantastic, Ferrari on home soil, that should definitely be worth a watch! Well, thank you, Neil, for joining us once again. And I look forward to catching up with you again next week.
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