Transcript
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, 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
Thank you very much Matt. It's great to be here.
Matt Jones
So it's been a quieter week this week in terms of data and of course, entering into the ECB blackout period. How are we thinking about events next week? Perhaps let's start with the ECB.
Neil Staines
Yeah, that's right Matt. In Europe next week, it is really all about the monetary policy trajectory and the ECB and where the reaction function fits in relation to recent disappointing growth. Now there is a split across the governing council members between Northern and Southern member states, there's also a growth split that we've seen recently with peripheral outperformance of core countries. Now this morning we saw February CPI print come in above expectations, and that will have implications for the renewed ECB staff projections at the March meeting. Now, the December meeting had 2.7% as a year end rate, and with today's number coming in at 2.6, we're not a million miles away from that; certainly closer than the market had hoped in terms of its expectations for significant downward revisions at the March meeting - so not enough, certainly not enough for a rate cut in March and the high frequency data has noted that the PMs have stabilized. And that wage growth is still above levels that is consistent with inflation at target.
Therefore, a continued caution on the governing council was, seems likely and seems to, is likely to emanate through the statement, the big focus across the press conference and the statement is going to be for any clues as to the timing of rate cuts throughout the year from the ECB.
Matt Jones
Thank you Neil. And of course in the UK it's budget week now, before we get into the detail, have you seen the Bloomberg budget game?
Neil Staines
I have indeed.
Matt Jones
I have to say is fantastic. And for anybody listening, we'll put the link in the show notes. Do take a look! You get to be the chancellor. And don't do as I do, because my results ended up with me getting fired as the chancellor. But definitely worth a look.
https://www.bloomberg.com/features/2024-uk-budget-game/
So what are we expecting and how should we view the fiscal event from a market perspective?
Neil Staines
Yeah. Thanks Matt, and from on that perspective, we'll stay away from the politics, even though they are quite lively in the UK at the moment. In the UK, it's all about the fiscal trajectory with the Spring Budget, as you say. Now, expectations are for a number of factors that may be adjusted by the chancellor. Basic rate of tax, fuel duty freezes, and or outright cuts, Non Dom tax status amendments and windfall tax extensions, both arguably borrowed from the opposite side of the house. Now the government's aim will be to boost growth and their popularity, in what is likely to be an election year. And really there are two emphasis that the market is going to be more focused on away from the politics. The first one, is going to be really what those kind of budget sweeteners, or election sweeteners are going to have on the medium term fiscal outlook, and that will be gauged by the OBR forecasts, but essentially what the response to those measures is in the gilt and credit markets, so that'll be one area that we will look closely at. And then secondly it's the view on growth. So how the measures are likely to promote growth boost going forward again, gauged by the expectations from the OBR who will have the full extent or a greater extent of the plans and what that essentially is likely to mean for the path of growth, the path of inflation and therefore for us. So coming back to that, all important monetary policy trajectory, ultimately as a function of the budget.
Matt Jones
antastic. Thank you. And finally, of course, it's it's our favorite week. It's a time for hashtag team over or hashtag team under. It's going to be payroll week. What are the key elements of the jobs report for global markets?
Neil Staines
Absolutely. In the U.S. it's all about the growth trajectory and it's a very action packed week next week, we get ADP, JOLTS, Challenger and ISM services. All of which are going to be keenly scrutinized for the jobs component, but really it's all about payrolls. There'll be a huge focus on the economic momentum as a result. The January data is currently showing, according to the Atlanta Fed GDP nowcasts, above 3%, and payroll is really, we'll put this into perspective.
The headline moderation from the jump that we saw in January as expected, the extent of which is going to be important for expectations going forward and certainly shaping the narrative around whether or not January was a turn or a foothold for stronger growth going forward. Or anomalous and a seasonal adjustment. More specifically, there's going to be a big focus on the average hourly earnings component, which we believe was distorted by weather events and opposing the inference given by the perhaps more rigorous employment cost index. So wages is going to be a big focus in the U.S. there, we discuss all of this in this week's blog. We ultimately see a disinflation, growth moderation theme as being the dominant factor and that leading to an asymmetric or dovish Fed reaction function. It's a huge week for monetary, for fiscal and for macroeconomics, so fasten your seatbelts, Matthew.
Matt Jones
Fantastic. Thank you, Neil. I look forward to catching up with you again next week.
Neil Staines
Thanks very much, Matt. It's been a pleasure.
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