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
We've had a significant number of Global Central Bank meetings this week, as you obviously highlighted in last week's podcast. But leaving the Fed and the Bank of England to one side for a moment, how are we looking at the events of next week, given this week's monetary narratives?
Neil Staines
Absolutely. Good question. Yes, Matt. We've had a huge number of central banks this week, as you say. 50 basis point cuts from Brazil and the Czech Republic. A dovish bias turn from the Norges Bank. A modest increase in rates from Taiwan and a huge Increase from Turkey. Next week, central bank rhetoric will be clearly very important in terms of the corroboration or conflicting narratives from the central bank action this week.
But specifically we'll be looking out for Australia this week where CPI inflation data from February will give us some clarity, hopefully, to an opaque monetary backdrop there. In Australia, inflation has been pressing on the top side due to supply side issues, according to the RBA productivity and high unit labor costs among others.
But CPI that released this week is likely an important barometer of activity, important for the RBA, FX rates, and for the rates market. In Japan, after the Bank of Japan raised rates for the first time since 2007 this week, removing negative interest rates and yield curve control policies.
The data this week on our bank holiday Friday this week, unemployment rate, retail sales and industrial production will be keenly watched for further normalization in the economy and the ability of the Bank of Japan to continue that normalization process. Also, we get the summary of opinions from that Bank of Japan meeting and that'll be keenly noted for inference on the breadth of view across the policy board.
And also the prospects for further monetary normalisation beyond the removal of negative interest rates that we saw at this week's meeting.
Overall though, the theme from this week's meeting has been clearly more in a dovish direction.
Matt Jones
Turning to the Bank of England, they again left rates unchanged at 5. 25 percent this week.
However, despite the absence of updated projections, it appears to have been an interesting milestone, nonetheless.
Neil Staines
It certainly does, that's right. Yes Matthew, the Bank of England voted unchanged. But the split of votes was 8 1, as we had suggested it was likely to be in last week's piece.
And that's a change from 2 6 1. Now that means two votes for a rate hike have disappeared. The one vote for a rate cut has remained. And it's the first time since 2021 that there has been no vote for a rate hike at the Bank of England meeting. The view on growth is clearly weaker from our perspective than the headline data suggests.
We continue to hold that view on. There have been some signs or some increasing signs that growth is slowing more clearly, particularly on the anecdotal side. Now, retail sales this week was slightly higher than projected.
However, the retail sales is a value series, and on a volume basis, the numbers are down, i. e. people are buying less than they did pre COVID. That's something that certainly conflicts with the idea that real wages are supporting increased demand.
The CPI data that we had out this week also saw a significant correction. And I think that's very important more broadly, particularly when we put this in the context of the Bank of England projections. Now, until recently, the Bank of England forecasts had a significant forecast skew or an upside bias to the projections based on their expectation that second round effect of inflation would skew prices higher going forward. Now, what we've seen over the, over recent weeks and months now is that the the second round effect failing to materialize. And therefore that has brought the projections of the Bank of England more clearly to the downside, risks to the downside and also clearly showing a decline.
The fact that at the forecast horizon the Bank of England projections are now clearly below target something that should elicit a more dovish response. Now Bank of England's Bailey following the meeting this week was quoted in the FT suggesting exactly this, that second round effects have failed to materialize.
He also went on to say that every meeting is effectively live from now and that they don't need to wait until Inflation gets to 2 percent before bringing on a cut. So a very important milestone for the UK, a dovish milestone for the UK for monetary policy, for sterling and for rates markets.
Matt Jones
So the Fed also left rates unchanged this week, and they left the median dot unchanged, implying three rate cuts this year. How does this impact markets, and what are you going to be looking at next week in this regard?
Neil Staines
Yeah, I think it's, again, a very important meeting from the Fed. Leaving rates unchanged at five and a quarter.
So a five and a half percent target range importantly, the median dot for 2024 or the median point of the fed member rate forecast was left at three rate cuts. There was certainly speculation that was going to slow to two rate cuts given the Higher than expected CPI in particular, although also some areas of growth data recently now in the summary of economic projections There was also this Increase in growth and inflation and a downgrade to the unemployment rate Many have extrapolated this as in inferring Significantly higher rates going forward.
We disagree with that in many respects now in some ways This upgrade in growth and inflation projections reinforces our view of an asymmetric reaction function from the Fed, particularly in light of them maintaining three rate cuts going forward. Weaker data would imply more cuts and faster action relative to the current forecast space.
A market extrapolation of U. S. growth outperformance and therefore a dollar higher has been key in markets at the moment. And we'll be watching that very closely into next week. Which next week is also a holiday shortened week.
We'll be watching Fed speakers very closely next week. Fed's Waller in particular on Wednesday for any clarity in relation to the upgraded macro variables and rate cut expectations.
The data now in the US takes on much more importance. We still are on the side of dollar weakness through 2024. Current levels being more attractive, but volatility is certainly likely to rise in the near term.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next week.
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