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, Neil.

Neil Staines

Hi Matt.

Matt Jones

As we look ahead to the upcoming week, I think it's fair to say two of the larger economies in focus are going to be China and the US, but also touching on some of the some of the recent blog posts that you've written, and the great normalisation. As you're looking ahead to the week, what are going to be the key areas of focus for you?

Neil Staines

Yes absolutely, thanks Matt.

On Wednesday, we get the China manufacturing and services PMI for June. Now, this is going to be a big focus for the market. The moderation of China growth has become a key discussion point at the moment. We remain relatively positive on China's continued economic strength in the medium term and in the long run. But we do see something more L-shaped or more stable in the near term from here. And indeed, expectations for these PMIs are for a broadly flat reading in May with continued services outperformance. Anecdotally perhaps it's interesting, we are sympathetic to the prospect of a Chinese structural evolution to their economy away from the services led growth model and towards a more comprehensive internal supply chain model, more akin to the German model in a post covid world. So this may be also something to watch as how the interaction between services and manufacturing plays out over the longer run. But ultimately, China PMI for June will be a key focus not just for China but also for those global economies that are reliant on China growth and the global export demand. So specifically, or most notably, Germany and some other European countries and of course, many emerging market nations.

Secondly, and it's come round very quickly, we're back to payrolls in the US - or the US employment report for June. I think recently last week's PMI data highlighted a moderation in the employment component of the PMI as a function of the availability of staff. And I think that this is really one of the key discussion points at the moment, this supply and demand of labour mismatch. This is key for the US, whether it's a function of the - as some would describe, overgenerous fiscal stimulus or paycheques for people to stay off work, essentially - covid related seasonal anomalies. I do certainly think that we saw at the beginning of summer where traditionally there would be heavy seasonal hiring, that didn't take place as rehiring of laid off staff took precedence. And I think that has implications over the rest of the summer and for the inference as to the tightness of the labour market going forward. But there might even be some skills mismatch out there, which takes a little while to play through. Ultimately, though, we are confident that the labour market gains resume over the summer - even accelerate - and that this is the key to the attainment of 'substantial further progress' and ultimately the unlocking of monetary normalisation in the US.

And then lastly, a broader focus on normalisation, if you will. We have mentioned in previous blogs about normalisation now being in train. That's certainly been broadened now over the last couple of weeks. This week, we saw rate hikes from Czech Republic and Hungarian central banks and also a surprise hike from Mexico. I think there is specifically going to be a focus on rhetoric from central banks and on some of the high frequency data specifically across EM, where the threat of the un-anchoring of inflation expectations is greater and therefore rate hike expectations are bigger. So we're certainly focussed on the front end - Latams are leading the fray in this front - even if we have some reservations that aggressive front loaded rate hikes will do little to address inflation, which is essentially driven by external factors, not demand driven factors. This could simply lead to still high inflation, but tighter financial conditions. That is a question for the more medium term. But in fact, of course, it will have some impact in terms of insulating effect from higher yields in terms of capital flow. So that's a key focus - normalisation and a prospect of normalisation across the broader global economy.

Matt Jones

Thank you, Neil. As ever, lots to look forward to in the week ahead. But as we look to the weekend now, I think it's fair to say we've got quite a diverse mix of things to keep us interested. I know what I've got my eye on for the weekend. What about you?

Neil Staines

Yes, absolutely. Another fascinating weekend certainly from a sporting perspective. The Grand Prix heads to Syria and another fascinating race with three wins each now in the season for Verstappen and Hamilton. It really is turning out to be the season that it promised to be. Secondly, we have the first knockout stages of The Euros. Some fascinating line ups here: Wales vs. Denmark opens us off on Saturday; Belgium vs. Portugal promises to be a fascinating game; and then we have the tantalising, or possibly terrifying, prospect of England vs. Germany as the penultimate game on Tuesday. And then lastly, it's Pimm's O'Clock - we're back to Wimbledon on Monday and two weeks of, I'm sure, glorious sunshine and wonderful tennis.

Matt Jones

Absolutely, and, not wanting to put it in jeopardy, but at least the weather does look quite good for July. So fingers crossed for some fantastic action on Centre Court. Thank you once again, Neil, for outlining your thoughts on the week ahead, and we look forward to welcoming you back again next week for another episode of "The Long and Short of the Week Ahead". Have a great weekend.

Neil Staines

Thanks very much, Matt.

Matt Jones

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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