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

Thanks very much. It's great to be here.

Matt Jones

So a fascinating week in markets from a monetary policy perspective, and although next week is perhaps a little bit light on the data front, there is still plenty for us to be focused on. Perhaps you can share your thoughts as to what you are going to be looking at in the week ahead.

Neil Staines

Yeah, absolutely. Thanks very much. The UK has been brought back into focus by the Bank of England this week as they elected to hike rates by 25 basis points to half a percent and begin the runoff of QE assets by ending automatic reinvestment. That's a very important point there as well. Indeed, the intent of the Bank of England to address this, the supply shortfall, or at least the structural components of that with tighter policy and to prevent second-round inflation effects and the destabilised inflation expectations were reinforced somewhat by the fact that there were four dissenters on the Monetary Policy Committee who preferred a 50 basis point hike - that was Haskell, Man, Saunders and Ramsden. However, while the Bank of England is clear in the need to adjust policy in the near term, they were also clear that the rate of further tightening will remain modest, and that's particularly clear in the reference to the growth outlook being revised lower.

In fact, furthermore, the inflation projections using market rates saw inflation significantly below target of the forecast horizon, effectively outlining the fact that markets are pricing too much or expecting too much hiking from the Bank of England. So in conjunction with this, the Bank of England were clear that the labour market remains strong. But growth, certainly on the consumer level in particular, will moderate over 2022 as prices, taxes and rates all impact consumer finances. So next week, it will be very important to get some clarity on the Central Bank, but also the political narrative within the UK as in essence, the Bank of England narrowed the range of possible rate paths or sold volatility as we might want to think about.

Then on the other side of this, the ECB actually widened the range of possible near term rate paths. Or you could say this week they bought volatility. Essentially, the ECB gave an updated narrative on the discussions of the ECB around inflation that was the core focal point. In December, it was clear that there were two camps or divergence on the governing council. The Hawks, predominantly the northern states for whom inflation is the key focus. And then the more cautious or likely more heavily indebted southern states for whom monetary support was more a primary consideration.

This week, ECB President Lagarde said that the concern about inflation was unanimous, and that brought a bit of a shift in sentiment. Now, while the statement retained a gradual programme for the tapering of asset purchases, essentially taking all of 2022 and maintained the sequencing argument i.e. that QE purchases must end sometime before rate hikes can be made, the more positive communication from Lagarde and the heightened inflation sensitivity on the governing council has seen markets price a much faster tapering of those asset purchases and even price two 25 basis point rate hikes in this year 2022. A very sharp swing in sentiment, indeed. Now, the key part of the puzzle likely remains the stability of peripheral spreads. Markets are pricing significantly higher rates than pre-COVID, and many states are also significantly more indebted so that trade off there is something for markets to grapple with as ECB policy moves towards normalisation. Now next week for both the UK and the eurozone, central bank commentary will be very key to market attention, particularly with any further clarification in relation to spread sensitivity in the euro zone.

And then lastly, we come back to the Fed and US inflation. So on Thursday, it is likely to see headline inflation in the US rise to seven point three percent, perhaps even higher than that. And the core to five point nine percent quite incredible levels, really and are likely to warrant the Fed wanting to maintain maximum optionality, if you like, with respect to 2022 rate hikes.

So this week has seen some sharp adjustment in forward rate expectations, certainly based upon heightened uncertainty. Next week, any data or official commentary that emphasises the widening or narrowing of those uncertainties and by extension, the volatility of the rate curve will certainly be key not just for respective yields, curves and spreads, but also, from our perspective, very much for the foreign exchange markets.

Matt Jones

Thank you, Neil. Certainly lots to be keeping an eye on in the week ahead. In the meantime, though, we have an action packed agenda, I think, for the weekend, including the start of the Winter Olympics. I won't steal your thunder when it comes to what you have an eye on there. But one interesting element, of course, is the roll out of China's digital currency across the venues. It will certainly be interesting to see how that progresses, but from an event's perspective, what have you got your eye on?

Neil Staines

Absolutely. Fascinating things. I mean, you know, this weekend we'll be focussing very much on an international and national and also European level. So to start with the opening ceremony of the Winter Olympics has been pretty spectacular so far from what I've seen, and early medals are available over the weekend.

On Saturday, we see some freestyle skiing medals, ski jumping and speed skating. And then on Sunday to go with that luge and snowboard sounds fascinating stuff. Then in the UK, FA Cup action over the weekend, a couple of David and Goliath match ups West Ham away to Kidderminster, Borehamwood at home to Bournemouth. There should be two fascinating games. Really, these are what the FA Cup is all about. But for me, there's only one big event over the weekend and that's the start of the Six Nations kicking off with Ireland v Wales, then Scotland v England and then Sunday, France v Italy. I shall be there on Saturday afternoon. England shirt on singing the national anthem at the TV to my heart's content.

Matt Jones

Thank you, Neil. An international affair and I'm very much looking forward to the rugby as well. Well, thank you once again for joining us and for sharing your thoughts on the week ahead. We 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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