of the week ahead

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 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.

Neil Staines

Thank you very much Matt. It's great to be here.

Matt Jones

So this week, as we look into the week ahead, it really is all about Central banks. So perhaps you can share your thoughts on, what you're gonna be looking at next week.

Neil Staines

Yeah, absolutely. Thanks, Matt. The week ahead is really all about Central Banks, as markets continue to grapple, with the growth inflation trade offs in relation to central bank reaction functions. Now, after this week's heightened volatility surrounding the August US inflation print,and the knee jerk re-pricing of front end rates and higher terminal rate expectations. The September FOMC meeting, on Tuesday, will be of crucial viewing for financial markets. Now until the CPI print markets had used positive economic data or upside inflation surprises to bring forward rate hikes, but relative to the June dots the terminal rate remained relatively consistent somewhere around that 4% level post CPI. Which, as we discussed further in this week's blog, it was a modest miss, relative to expectations, with headline inflation still moving in the right direction, albeit, with a slightly higher core rate. The concern has been that a slower return to normal inflation levels means a more persistent hiking cycle and thus a higher terminal rate in the US. My concern, and from, overnight, it seems also, mildly the concern, of the World Bank in some respects is that a higher terminal rate expectations likely don't take into account the lag in monetary policy impact. Essentially the time between the rate hike and the full impact of that rate hike on restraining demand or even the slowing of the global economic backdrop itself more of a factor for the world's Central Bank that the Fed is. Now this week, FOMC therefore will be important at many levels. A) the rate hike increment and a company in communication will be a key focus from our perspective, 75 basis points is the most likely outcome but this is fully priced by markets. B) the communication around the inflation trajectory relative to the previous commentary and also relative to the August inflation print will also be key. C) the summary of economic projections, the updated version of those specifically, do the Fed adjust growth below zero at any point in the forecast horizon implying a form of recession the extent of the unemployment rate rise and again, further signs of negative growth trajectory and changes to the inflation trajectory throughout the forecast, period. Key for markets to balance that inflation and growth fears in relation to rates and then lastly, D) or dots, while there continues to be a significant dispersion, or there will continue to be a significant dispersion. The median dots for this year and for next will likely be a key focus for markets. Will the fed move up to market rate expectations, following the CPI? And finally, do they keep the long run or equilibrium rate expectation or bots unchanged at around that two and a half percent level that has significant implications for the long end of the rate curve.

Secondly, we get a broader array of Central Banks next week that are also worthy of note Brazil, Switzerland, Indonesia, South Africa, and the Bank of Japan, to name a few and of those Switzerland is expected to hike 50 basis points, taking the key rate to positive 0.2.5% from minus 0.25, a very rapid change in the backdrop from the deepest negative rates in the world to positive in two steps. Brazil is at the opposite end of the spectrum having hiked aggressively ahead of developed market central banks taking rates from 2% to their current 13%, unchanged rates as expected next week likely offer a more supportive signal to bond markets ahead of the all important elections next month. The Bank of Japan, however, may be the most significant, non US market next for next week certainly for developed market FX. The Ministry of Finance and the Bank of Japan have recently stepped up their FX rhetoric in response to Yen weakness, likely pushing verbal intervention to its limits. Now, so far, this is held Dollar Yen below the 145 level but if the bank of Japan keep their yield curve controlled target commitment, and thus anchoring Japanese yields near zero and facilitating a wider spread relative to the US, then the MOF may need to put their money where their mouth is, so to speak. Now important viewing for Dollar Yen and likely for the dollar more broadly.

And then lastly, the focus comes back to the Bank of England. Now at the last Bank of England monetary policy report the bank gave some pretty dire economic forecasts. They did so however, in the absence of a fiscal response to the increasingly acute energy price shock as a function of the fact that there was no government at the time. Since then, we have had a huge intervention from the new Liz Truss led UK government, again, a topic that we discuss in this week's blog, and we also get a fiscal event or a mini budget from the new Chancellor, on Friday. Now while Chancellor Kwarteng's fiscal event is unlikely to make, it into the Bank of England forecasts now the energy price cap commitment will. Markets will therefore be very keen to gauge the extent of the downward revisions to the bank's inflation forecast throughout the forecast horizon, and perhaps upward revisions to the general growth projections. This growth in inflation balance is again, key to the monetary reaction function. Now on balance, we think 50 basis points is the most likely outcome at the bank of England meeting, probably with a dissent for 25 basis points from Silvana Tenreyro on growth concerns and for a 75% from Mann and Haskel on inflation concerns, another big week for the UK and another big week for Sterling.

Matt Jones

A big week, indeed. And a lot to be looking out for in the week ahead. Well, thank you once again for joining us and for outlining your thoughts. 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".

Disclosure

None of the contents of this document should be understood as constituting research on investment matters, or as a recommendations, advice or suggestions, implicit or explicit, with respect to an investment strategy involving the financial instruments discussed, or the issuers of the financial instruments, nor as a solicitation or offer, nor as consulting on investment matters, of a legal, fiscal, or other nature. All the companies of the Intesa Sanpaolo Group, its administrators, representatives, or employees, decline any responsibility (fault-based or otherwise) deriving from indirect damages potentially caused by the use of this communication or its contents, or in any case deriving in relation to this document, nor may they be consequently held liable for any of the above. The information provided and the opinions contained in this document are based on sources considered reliable and in good faith. However no declaration or guarantee is offered by Eurizon SLJ Capital Limited, explicitly or implicitly, on the accuracy, exhaustiveness and correctness of the information, and there is no guarantee that results, or any other future events, will be compatible with the opinions, forecasts, or estimates contained herein.

Views accurate as at the time of publication. Opinions expressed by the authors are their own and do not necessarily reflect those of Eurizon SLJ Capital Limited, Eurizon Capital SGR or the Intesa Sanpaolo Group.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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