of the week ahead


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

For regular readers of your blog, they would have noticed over the last, probably fair to say two to three weeks, that the focus has really been on the ECB and the Fed. As we look to to the week ahead, are we going to see more of the same or will attention perhaps turn back more towards the UK?

Neil Staines

I think there are some very, very interesting points this week, and we are indeed turning back - after the ECB two weeks ago, the FOMC last week - this week is the turn of the Bank of England.

It is it is quite an interesting Bank of England meeting this time around. Thursday will be the latest of the Bank of England Monetary Policy Reports - the quarterly inflation report, in old money - and the last time that that was released, three months ago, it was a very different backdrop. There was a covid resurgence; there was the UK variant that had taken hold across the country; there were lockdowns. The situation was overall pretty bleak. And in fact, the market focus, or the market attention, was really focussed on the prospects of negative rates in the UK. This time around, we're likely to see significant upgrades in the projected growth path that will go all the way out to 2024, and all round a much more positive backdrop as the economy hits what Andy Haldane referred to as the 'rapid recovery phase' - the debate now not about negative rates or about further easing of monetary policy, but about the prospect of tapering or tightening of monetary policy in the U.K. The first stage of monetary normalisation, if you will.

Now, there are two schools of thought on this. The first being that there will be a gradual but earlier start to the tapering, and that could well happen this Thursday, from the current pace of around £4.4 billion pounds worth of asset purchases a week down to around the £3 billion level. That would be an equivalent amount that would be able to see us through sufficiently to the end of 2021, which is the projected timeframe for the the purchase of the full envelope that was announced by the Bank of England. The other option is to carry on at the current pace and then have a slightly more dramatic fall off later on in the year, perhaps when we get more of a convincing progress report at that stage. So essentially, we're looking at the QE taper, whether there is a change in the purchase pace projections; also, whether there is any information or inference on the sequencing of monetary policy. I.e. is there a point at which rates can be raised before asset purchases are beginning to be sold down - the stock of assets I'm referring to in that point - or whether there is a determination to do that the other way round, and any implications that the new forecasts have any bearing or implications on the rate hike timing going forward. Now, that's some way away yet. But, with inflation at target at the end of the forecast horizon, that would endorse the market pricing that we're seeing at the moment.

Secondly, there are a large number of local constituency and mayoral elections across the UK on Thursday. The London election is in focus, but there are also another 11 mayoral elections. From a parliamentary perspective, the Hartlepool by-election will be interesting particularly as in 2016, when the seat was last fought, there was a considerable vote share for the Brexit party, and depending on how that vote share gets split between Labour and Conservative will decide that battle ultimately. Scotland, which has been a big focus of the broader market attention over recent weeks, is going to maintain that attention into next week. Although, we can argue that some of the intensity of the debate has gone out, about the prospect of independence, on the basis that the polls have suggested a scaling back of expectations. However, if the SNP do gain these 65 seats, or the majority in the Scottish Parliament, then they may retain, from their perspective at least, what David Cameron described as a moral obligation to offer an independence referendum. So that is a key focus for next week, although I think that Johnson will have a different angle on that at this stage, given the backdrop.

Ultimately, from a domestic political perspective, there are no signs in the recent polling that the recent 'wallpaper-gate' saga that the mainstream media appear to have got very worked up about has impacted partisan voter preferences or indeed John Lewis. So overall, whilst there'll be lots to spin from a UK political perspective, very little to change really in the near term for us.

And lastly, the excitement comes back to the US with non-farm payrolls - or the employment report - for April. Now, market expectation is for another very substantial gain around the 1 million mark - expectations currently around 900,000 new job gains - with the unemployment rate to drop to 5.8%. The March Summary of Economic Projections by the Fed targeted 4.5% by the end of the year, so we are on a downward, expected trajectory. However, earlier in the week we saw Powell state that the Fed maintained this dovish narrative amid further tightening of the growth backdrop. I guess the real questions that are going to start to be asked is, is another 1 million job gains adding pressure to the growth narrative, to the inflation narrative? And by the June meeting, we could well have had three in a row somewhere around 1 million job gains. Powell was asked in a press conference recently that it would take a string of those job gains in order to to warrant 'substantial further progress', the buzzword, towards monetary tightening. It's only down to Powell at this stage to determine whether or not three constitutes a string.

Just to add to to that positive narrative in the US, we had the Q1 GDP this week and at the consumer level, exceptionally strong: 6.4% quarter on quarter annualised rate of growth in the US. But that was amid a significant drag from inventories and some very disappointing business investment and housing investment. So the underlying consumer picture, very, very strong still in the US, and the emphasis on inflation and on the inflation debate is going to continue to be kept very hot by this release.

Matt Jones

Thank you, Neil. Certainly lots going on from a UK perspective as attention shifts away perhaps a little bit this week from Europe to a lesser extent the US, of course. But between now and the week ahead in the UK, we have the first May Bank Holiday. So I'm sure across the country, in fact, across the United Kingdom, many people are looking forward to enjoying it as much as they can, against the backdrop of slowly easing covid restrictions. Outside of markets, what are you looking forward to for this weekend, Neil?

Neil Staines

The biggest difficulty this weekend may be trying to find somewhere for the traditional Bank Holiday weekend barbeque where it isn't raining, covid restrictions applying, obviously.

I think that there are a couple of things of interest this weekend. As the domestic football season edges towards an end, there are a number of very interesting clashes at both ends of the table throughout the football league. From my personal perspective, I shall be keeping everything crossed for Southend United, although I suspect that their fate is already sealed and their exit from the football league very sadly.

The Grand Prix travels back to Portugal at the weekend. Hamilton, after the mistake in Italy, opened the door to Max Verstappen and I think he'll be keen to reverse the order of events coming into Portugal this weekend. So that's what I'll be looking out for.

Matt Jones

Fantastic. Well, thank you, Neil. And 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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