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. Great to have you here with us again.

Thank you for joining us again. And this is the last episode of the season. A slightly different format this week, coming out at the start of the week that we're going to be looking ahead and in part after a season of such highs and lows, a season filled with controversy, we felt it only appropriate to to mark the end of our season with a slight retrospective after the result of the final Formula One race of the season. But in the meantime, Neil, this is arguably quite a big week in financial markets for the four central banks in particular. So perhaps you could outline your thoughts on the week ahead?

Neil Staines

Yeah, absolutely. Thanks, Matt. I mean, this week sees quickfire central bank meetings in developed markets, central bank meetings where the policy decisions have material implications for yield curves and for currency markets both into year end and through the course of next year. You could even say that it's central bank pantomime season, and it's not clear yet whether we'll get magic beans, golden eggs or indeed whether our carriages will turn into pumpkins, but it should prove fascinating viewing nonetheless.

In the UK, we get the October employment data on Tuesday and the all important MPC meeting on Thursday. Regular followers will know that we've been consistent in our view of a February rate lift off from the Bank of England, and I suppose you could say that this delay, relative to market pricing at least, amounts to a Christmas gift from Threadneedle Street. From a policy perspective we are comfortable with the assessment that the underlying inflation dynamic warrants rate hikes through 2022. To paraphrase Mervyn King's viewpoint, not least to manage down aggregate demand in line with the lower aggregate supply both through Covid and through Brexit related supply chain disruptions. We're also comfortable with the improved assessment of the post furlough labour market backdrop, as it's likely clearly demonstrated early this week. However, last week's GDP data for October was a little disappointing and likely highlight the Bank of England's concerns over the fragility of the near-term growth outlook and thus sensitivity to rate hikes. The breakdown of the October GDP showed services rebound but concentrated in the public services, doctors appointments and the like - a more concerning picture in the private sector, hotels and restaurants in particular. Thus, this further questioning consumer demand. Indeed, the Bank of England tend to look at November, December and January together to gauge consumer demand what with Black Friday, Christmas and January sales. A further argument for waiting until February. add in Omicron and with its likely complex inflation impact, we see demand uncertainties as enough for the Bank of England to hold off until its quarterly forecasts in February.

Also on Thursday, the ECB is back in the spotlight. At a September meeting, the ECB pushed a decision on the end of the programme or its transition to APP to the December meeting, at least in part, we're led to believe due to divergent views on the governing council. A divergence that was potentially a factor in the resignation of the hawkish anchor on the governing council. Now, as the December meeting is upon us, it's likely that these divergences are even greater. At one end of the spectrum, Germany has six percent inflation output broadly back to pre-COVID levels and debt at moderate levels, particularly given the uncertainties we've faced of late. Even with the proposed 60 billion euro stimulus plan from the new Traffic Light Coalition. Now, pressure to cease further monetary accommodation is thus there from the German contingent. On the other end of the spectrum, the southern states, debt dynamics are much worse even accounting for the Recovery Resilience Fund and the wealth distribution therein - and the prospect of the removal of ECB support for peripheral spreads is a major concern. Especially in the context of a potential Omicron wave this winter. So a difficult balancing act to find agreement on the governing council. Indeed it is possible that that decision may even be delayed again. But delay will not help and certainly not resolve the issue of divergence within the eurozone and the monetary policy headache that loom beyond the December meeting.

So fascinating viewing from the Bank of England and the ECB meetings. But the headline act is undoubtedly the December FOMC. Over recent weeks, much of the focus has been on The Chair's re-nomination and hawkish pivot and the inference of an impending acceleration of the QE taper narrative that has driven further flattening of the US curve. And while we're advocates of the front end repricing, we're also more inclined to think that the singular focus on the Fed's reaction function to near term inflation and thus earlier rate hikes, but still relatively few and thus a low terminal rate, understate the underlying assessment of very strong US growth. In the US there are clear signs of excess demand, not just a factor in inflation. Furthermore, it is important to frame the monetary normalisation debate around the emergency settings that were a function of the acute growth in liquidity conditions of March 2020. Not to mention the unprecedented fiscal stimulus. On this basis, we think that the expedited pace of taper is only a small part of the December FOMC minutes. The updated growth forecasts, long term inflation projections and expectations of the US terminal rate are equally important, if not more so for the yield curve and for the dollar.

Matt Jones

Thank you, Neil. Certainly a big week ahead for four central banks. As an aside, I have to say I'm absolutely loving the seasonal references and listening to you there speak about the Fed, a paraphrase of the old pantomime saying came to mind. "He's behind you. Mr. Yield Curve".

Neil Staines

Absolutely.

Matt Jones

And now, in a slight change to our regular format, where we would normally look ahead to to the sporting action on the weekend, we've had the culmination of what has been a fantastic season in Formula One, albeit a controversial end to the season. Perhaps you want to just share your thoughts on the activities of the weekend?

Neil Staines

Yeah, absolutely. You know, as far as sport is concerned, the weekend was really fascinating. England's attempt to salvage the first Ashes Test at the Gabba that proved more of a golden duck than a golden egg. In the Premiership Crystal Palace looked every bit the Cinderella, while West Ham and Newcastle much more akin to ugly sisters. But the highlight of the weekend was the Formula One incredible season, incredible race, incredulous decision. But the official the race official decision in the final laps were nothing short of a pantomime. We have said for weeks that this season's Formula One should be made into a movie and if it is, then this weekend's finale is all but guaranteed a sequel.

Matt Jones

I think there are no doubt hundreds of thousands of fans around the world looking forward to that sequel. It's been fantastic to be meeting with you and listening to your thoughts throughout this season. We will be reconvening week commencing January the 10th for the third season of the long and short of the week ahead. In the meantime, I wish you and your family a very happy Christmas.

Neil Staines

Absolutely same to you. Thanks very much.

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".

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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