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 after a shorter and in some regards, quiet a week for financial markets last week the data and event frequency picks up again next week. How's that looking?
Neil Staines
Yeah, absolutely.
It's important to just to cast an eye over the data that we have had this week, the data and events that is. ISM manufacturing started off the week on a bank holiday Monday with a slightly higher print in the headline, with prices rising and employment still in contraction, not necessarily justifying the outsized move that we saw in markets on that Monday. Services subsequently coming in lower than expected, but the price is falling into a three year low, and employment again in contraction, and I still think that this message is consistent with our narrative of Continuing disinflation and growth moderation.
Powell also spoke this week saying that it's too soon to say if the start of the year's data is more than a bump in the road, and that the data has not materially changed the overall outlook consistent more broadly with our thoughts on that. In this week's blog, we we discussed this further in relation to this uncertainty of the data that we've seen so far this year and the interpretation and extrapolation of the inflation and growth projections that the market has against what is a relatively cautious Fed narrative. Now, as you say this week, we do have some broader data to look out for. It's a slower start to the week. But we get Sentix data from Europe that will give us a better idea of business, investment activity, and sentiment, that's for the April. The UK GDP and trade data for February and the university of Michigan sentiment in the U.S for April also this week to look out for, in terms of this week's data.
Matt Jones
Thank you Neil, with central banks and the evolving monetary narrative increasingly important. Where is our global central bank focus next week?
Neil Staines
Yeah, quite right. And central banks are very much front and center of the global market sentiment at the moment. Next week, we start with a couple of the smaller developed market banks.
After a slower start to the week, on Wednesday, we see the RBNZ and the Bank of Canada. So in New Zealand, with a weaker demand and a surprise drop in a Q1 GDP, but with inflation still above target and only moving slowly back towards that target; we expect unchanged there. Likewise, the Bank of Canada, where inflation has fallen more sharply, surprising to the downside in the most recent print, and unemployment continues to edge a little higher, but growth remains relatively okay. And on that front, both central banks waiting, perhaps even for a signal from the fed before they embark upon rate cutting cycles. The ECB though will clearly be the biggest focus of next week. We had the March CPI print this week, with a marginal, downside miss relative to expectations, but with services momentum continuing to pick up that takes away a little bit from the policy inference. The minutes and the ECB this week suggested that a bumpy inflation profile is expected after the summer.
And that again, adds to a more cautious narrative from the ECB. We expect them however, to continue to outline or move towards a rate cutting cycle that likely starts in June, but perhaps not quite so deep as the markets anticipate. Certainly given the fact that they were very clear in the minutes this week that the January to March period has indicated a very clear bottoming out of growth, and not only that with the recent spike that we've seen in oil prices, and the clear inference in the March meeting that the ECB saw oil prices is going down is going to have implications for the viewpoint on inflation going forward from the ECB. So still cutting. But a less clear narrative from the ECB. We also have the Bank of England next week where Ben Bernanke, former Governor of the Federal Reserve, has been employed to report on forecasting and monetary policy during times of significant uncertainty to consider the role of forecasts, and how procedures and analysis support the Monetary Policy Committee's deliberation and decision-making. That's easy for me to say. It may sound relatively academic, but ultimately we think that the findings of this will have significant connotations, not just for the Bank of England, but more broadly in terms of the forward guidance thus offered in times of significant uncertainty around the data as we have recently seen.
So that's something to watch out for also this week from a central bank perspective.
Matt Jones
Thank you, Neil. And as has long been the case for global markets. U.S data and policy inference remains dominant. What are the key focal points in that regard next week?
Neil Staines
Yeah, that's right. Again, the fed is very much front and center, after the payrolls at the end of this week, we focus on the CPI print next week and there's going to be a huge number next Wednesday, certainly in defining whether or not the Fed move in June, July, or even delay beyond that. Now markets are looking for a three and a half percent print in March, that's up from 3.2% on the headline measure, but core still moving lower from 3.8% to 3.7%. As we discuss in this week's blog, though, we think that the messaging from the Fed continues to be consistent with the Fed starting their rate cutting cycle in June, as PCE has been much more well behaved. Particularly if we look at it in relation to the Powell's often used comment, that rate cuts will be needed well before inflation hits 2%, PCE has been moving gradually down towards that, and we expect it to be around two and a half percent by the time of that June meeting. Now the FOMC minutes are out also next week and there'll be very keenly watched. The March meeting had very heavy emphasis on the updated summary of economic projections and the new dots, which maintained an unchanged median print for three rate cuts next year, even if there was a slightly more hawkish distributional change within that. Details and any emphasis within that on the growth and inflation projections will be very clear and very important for markets, particularly in relation to the reaction function of the Fed going forward. And we continue to see disinflation and growth moderation as key themes in the U.S economy, and therefore, rate cuts perhaps even accelerating if growth slows in the backend of this year.
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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