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.
Thank you very much Matt. It's great to be here.
So, for the last few weeks, we've been very focused on central bank land and activity from a policy perspective, looking into next week. What are you thinking as you look at global markets?
Absolutely. Yeah, thanks, Matt. After another complex week for financial markets, this week was very much dominated by developed market central banks. The Bank of Japan tweaked its yield curve control policy in a move that could be viewed as a precursor or a necessary requirement for the removal of negative rates. The Bank of England left rates on hold but offered a more dovish interpretation of forward looking growth and even in terms of labour market tightening. With inflation forecast significantly below target at the forecast horizon, the prospect for UK rates are increasingly dovish. And perhaps most importantly in the US, where the Fed left rates unchanged and gave its strongest suggestion to date. that the tightening of financial conditions read long yields and the lagged effect of cumulative rate hikes on activity, inflation, and economic and financial developments are at their peak. We expand upon these thoughts further in this week's blog and explain why we think this time it is different for duration and the dollar. Now, while the data calendar is a little light next week, there are a few things we will be looking out for.
Firstly, focus will switch back a little towards the global economy with the RBA on Tuesday. Now, analysts’ views are split, but on balance markets are expecting a hike of 25 basis points, potentially putting Australia on a different path to the rest of developed market central banks, who are more clearly ebbing in a dovish direction. China, CPI and PPI data and total social financing. Data will also be watched for further signs of stabilization following further supportive measures from authorities, including a significant fiscal expansion and targeted financial measures. German factory orders and Eurozone Centix investor confidence will also be on the radar as we gauge the progress of our recent discussions or thesis that the peak in global divergence occurred in Q3 and that going forward, the trend will be for a narrowing.
Secondly, following what we saw as a dovish iteration from the Bank of England last week, next week will bring something of a period of reflection. Chief Economist Hugh Pill speaks on the economy on Monday, and any inference on the growth inflation trade off will be keenly watched. Then on Friday we get the estimate of Q3 GDP, and also the estimate for the month of September. The bank revised lower its estimates for growth in Q3 and Q4 this year at the monetary policy report this week. So, markets will be keen to validate the Bank of England's forecasts to the incoming data with respect to the rate path expectations important for Gilts and for the pound.
Then lastly, following the FOMC this week, next week, the dominant factor driving sentiment is likely to continue to be the U. S. Treasury curve. Now, since the more dovish Fed interpretation and downgraded growth expectations, helped by a weaker than expected payroll, we have seen a significant sell off in duration amid what seems to be a structural shift in market sentiment. We think that U. S. GDP indicators now suggesting sub-trend or sub-equilibrium growth levels is a theme that can continue with obvious implications for the dollar and provided the growth trajectory is a slowdown, not a cliff edge. Also, positive for equities and broader risk assets. Now Powell speaks on Thursday and markets will be looking for indications of validation or disagreement with market interpretations, perhaps a more subtle focus next week, but cyclically very important.
A lot to be looking out for and to reflect on in the week ahead. In the meantime, though, it's the weekend, and hopefully a slight improvement in the UK weather certainly would be appreciated. But aside from that, what have you got your eye on?
Absolutely, the weekend indeed. We get a full Premiership schedule after the EFO Cup action during the week. Brentford versus West Ham and Newcastle versus Arsenal, the pick of the weekend's action. Formula One moves to Brazil before a weekend off. It's the battle for second place in the Drivers’ Championship between Perez, Hamilton and maybe even Sainz and Alonso that will be the focus now for the rest of the season. World Cup cricket continues with England versus Australia and India versus South Africa, which by rights should be the final. And overall, a slightly slower weekend for sport and just like the global growth data maybe a time for reflection, particularly if you're the England cricket team.
Thank you so much for joining us and for outlining your thoughts on the week ahead. I look forward to catching up with you again soon.
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