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 next week, of course, a very special week, I think not only from a Valentine's perspective, but also from a market's perspective. But without being too cliched, whereas you look into next week, is it going to be all roses for markets?
Oh, absolutely. Yeah. Thanks Matt, after a week of reflection, following the hectic events of the week before. Much of the price action this week has been driven by the debate over the inference of the respective central bank policy decisions that we saw. But also given the bank of England and the Fed in particular gave increased weight or emphasis to the evolution of the data on monetary considerations and the proximity of terminal rates from that perspective. Then also the data comes back into focus. Now markets thus have been very focused on last week's payroll data . And now more actively on next week's US CPI print on Tuesday or Valentine's day next week. From our perspective, the January payroll data is anomalous distorted by weather, strikes and most significantly by a seasonal adjustment. After two years of year-end COVID lockdowns the validity or the reliability of which that should at least be acknowledged. Now, daily headlines of large-scale layoffs by US companies have been discounted by markets. But we would argue that tightness in the labor market at the low end of the pay spectrum is not reflected in the middle. And thus the labor market tightness does not have the linear implications for wage growth or consumer demand and thus inflation as it otherwise would have, particularly as we see significant asymmetric, downside risks to demand from elsewhere. So next weeks CPI print therefore it will be key to the recent market dynamic. Higher payroll number drove US rates back up, the curve flatter, equity markets lower and the dollar higher. All counter to what we see as the dominant themes for 2023. Expectations are for inflation to continue tracking lower. And this will be the key focus for next week.
Secondly, it would also be a big week for the UK. After the bank of England raised rates, 50 basis points on February 2nd, the markets of marked term yields was lower and priced the rate cuts around the end of this year. Now in the UK debate is very clearly about upside risks to inflation against a clearer downside trajectory of growth. If those upside risks do not materialize. Then rate cuts will likely be required from the bank of England. As encapsulated by the bank of England's projections for inflation, close to zero at the forecast horizon conditioned on market rates. Therefore this data will be key, it will be a key focus on markets, employment data on Tuesday, inflation data on Wednesday and retail sales data on Friday. Important data to gauge the progress of this inflation versus growth trade off on the appropriateness of monetary tightness in the UK.
And finally the Bank of Japan, also on Tuesday we get the formal nomination for the new Bank of Japan, governor. The choice of new governor is very important on the implications for future bank of Japan policy. The continuation of the Abenomics maximalist, easing stance. Now or less activist candidates, more sympathetic to a policy normalization, the end of yield curve control that has significant implications for rates and the Yen. Rumor at the close of this week is academic and form a bank of Japan policy member. But we'll find out next week and markets will react accordingly. So it's a big event, a big data and another big week for financial markets.
A big week, indeed. And lots of focus on Tuesday. On all fronts, really. So in between that though we have the weekend. I probably don't really need to ask you where your focus is going to be fair. But just for fun, I'm going to, what. What have you got your eye on?
Absolutely. I think. You're absolutely correct there, Matt. There is some cricket, the combination of the India, Australia test from Nagpur. After a very terrible start from the Aussie’s. Very different conditions of course, but maybe a heads up for the Ashes this summer. There's another full premiership schedule kicking off at the London stadium as a West Ham host, super spenders Chelsea. And I should have just enough time to get from Stratford to a suitable television screen in time for the rugby. With Ireland, France followed by Wales, Scotland. And then on Sunday England host Italy. Can't wait.
Absolutely. Shaping up to be a very interesting. Six Nations season, indeed. Thank you very much for your time, once again, and for outlining your thoughts. Enjoy the rugby and I look forward to catching up with you again next week.
Thank you for joining us for "The Long and Short of the Week Ahead". Further insights are available on our website eurizonsljcapital.com/insights. We look forward to you joining us again next week for more insights into macro-economic events and "The Long and Short of the Week Ahead".
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