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 back, Neil. It's good to have you here with us again.

Neil Staines

Thanks very much, Matt, it's great to be here.

Matt Jones

Looking at the week ahead, I think we've got a few points of interest, maybe even points of tension, and certainly some taxing times ahead for the UK in particular. Perhaps you could outline your thoughts on the week ahead, Neil.

Neil Staines

Absolutely, yes, thanks, Matt. You could even say we've got some divergences, some conflict and even some rivalries.

Firstly, we start with the UK budget next week. For the last couple of weeks now we have discussed a more complex backdrop for the UK. Acute labour and product shortages have led to a surge in consumer prices, inflation expectations and ultimately to monetary policy normalisation expectations. This has been duly ratified by recent Bank of England commentary, even the new chief economist Huw Pill this week suggesting that November is a live meeting. But to make that more complicated, we've had a fall in retail sales, a drop in consumer confidence, rising COVID cases this week. This makes the monetary policy call very complicated. So what about the fiscal side? It's been much more positive. Essentially, the OBR forecasts back in May were very conservative, and thus growth and revenue forecasts should be comfortably exceeded - for this year, at least. And spending has also been lower, and thus there's around 40 billion sterling downward revision to borrowing forecasts for this financial year. And further, while inflation has clearly been a headache for the Bank of England Governor, it's something of a boon for the Chancellor, with nominal GDP significantly higher over the rest of the current parliament, even if rates push up debt servicing costs, and we have seen the gilt curve flattened significantly on the combination of front end tightening and global growth moderation and supply chain disruption and even previous fiscal tightening. So overall, a better starting position and an improved nominal growth trajectory set the UK public finances on a firmer footing, albeit with nascent recoveries and continued supply chain disruption. Therefore, we don't really expect much in terms of giveaways from the Chancellor this time around, certainly this far out from a general election. And that pushes the ball firmly back into the Bank of England's court with the MPR - the Monetary Policy Report - and some tough decisions a week later for the Bank of England.

And secondly, next week sees the October ECB meeting. Now this was meant to be a non-event with no new forecasts, and the decision or the debate regarding the future of ECB QE or the transition from PEPP to the APP programme with or without a bridge already being pushed to the December meeting in September. However, in the short period since the last ECB meeting:

  1. There has been a dramatic increase in energy costs; one that has likely increased growth divergence across the region, it wasn't a uniform energy cost increase.
  2. Secondly, an intensification of supply chain disruption and this has really hit Europe's auto and manufacturing base pretty hard with the sharp downward revisions for 2021. They are albeit partly offset by some upgrades next year on an expected resolution to the issues.
  3. And then thirdly, rising longer term inflation expectations have led the market to price in a 10 basis point rate hike as soon as 2022 in the eurozone, a concept that General Council members have so far been very keen to push back upon.

Now indeed, while the Bank of England likely has a difficult decision between the impact on medium term inflation expectations and medium term growth prospects, the for and against of a rate hike - or two actually, as as the market is currently pricing for this year - the ECB likely has a complicated debate among itself among General Council members. In September, the minutes showed widening divisions in the Governing Council over the policy rate path. The more acute inflation pressures since the meeting will only likely exacerbate those difficulties. However, we have seen the resignation of Bundesbank Chief Weidmann over the course of this week and that should slightly swing the debate. We don't have updated forecasts in this month, but it is likely that divergence of views between members carry over to the policy relevant meeting in December. But on the note of Weidmann, without the arch inflation hawk the ECB is likely to err closer towards MMT-like approach of monetary policy, with talk of closer fiscal and monetary dovetailing already emerging. The ECB is, in our view, staying dovish.

And then lastly, we get more high frequency data during the week. The October eurozone CPI print may be an interesting focal point; it may bring some solace or urgency to the ECB debate. And likewise, the US September PCE data, the Fed's preferred inflation gauge, may also exacerbate what we see as a more hawkish linear pivot as we like to refer to it - a continuation of the hawkish pivot that the Fed has seen over coming weeks. However the US is also likely to highlight the growing divergence between DM economies. US growth and inflation backdrop is likely less hostage to global events, supply chains and even to Nord Stream 2. And monetary policy still provides a substantial level of accommodation to the economy, certainly relative to pre-COVID levels. The ECB forecasts are likely to continue to show a medium term inflation print below 2% when we finally get them this year, and that facilitates a step up, if you will, in the APP to bridge an expiring PEPP QE programme. From my standpoint, that is certainly an increase in ECB accommodation at the same time that the Fed starts moving in the opposite direction, even accounting for alternative views on the stock vs. flow arguments for QE. Either way, for us, the US divergence continues to be a key dynamic in DM, with the US likely widening its growth and rate differentials in Q4. And for us, that means that the dollar should continue to stay firm.

Matt Jones

Thank you, Neil, plenty to be looking forward to in the week ahead. In the meantime, though, over the weekend in particular, it's a weekend of rivalries, I think. What are you going to be watching over the weekend?

Neil Staines

Absolutely, Matt. It really is. It really is a weekend of rivalries and conflict. To start with, we're back in Premier League action and there are some very close grudge matches: West Ham vs. Spurs and Manchester United vs. Liverpool. On the T20 World Cup cricket we have Australia vs. South Africa, England vs. Windies and India vs. Pakistan. So a lot to focus on there. And then we're back in the Max vs. Lewis rivalry: Formula One heads to Texas for the US Grand Prix before it goes onto Latin America to start November. And if sport isn't enough for you, then perhaps you might like to listen to some Blur and Oasis and perhaps even watch Alien vs. Predator.

Matt Jones

Thank you, Neil. I think, though, with the composition of my family, it's going to be more Tom and Jerry than Alien vs. Predator. But either way, I think a weekend packed with plenty of interest. Well, thank you once again for joining us and outlining your thoughts on the week ahead. I look forward to catching up with you again next week.

Neil Staines

Wonderful. Thanks, 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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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.
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