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 again.
Thanks very much, Matt. Nice to be here.
So the week ahead sees the start of what I'm going to describe as an epic battle between developed and emerging markets. We will come on to the T20 World Cup later on. In the meantime, though, perhaps we probably should focus on macro events in the week ahead. So looking into the week ahead, what have you got your eye on?
Absolutely. Thanks very much, Matt. Starting off, there's going to be significant focus on the monthly China data on Monday. We get Q3 GDP, we get retail sales, industrial production and the unemployment rate for September. Now, as we alluded to in this week's blog, there's a very complex global macroeconomic backdrop at the moment. This is centred around the persistence and intensity of inflation pressures, not just in terms of the implications for medium term growth prospects, but also the implications of central bank reaction functions to defend their inflation fighting mandates. Now, obviously, there's a clear conflict there between those factors, falling growth (or lower growth) and higher interest rates. Particularly when the vast majority of price pressures are a function of supply constraints rather than excess demand, the kind of traditional area for central banks to manipulate policy. The China data will be very closely watched, not just as a function of global supply, but also of signs of increased likelihood of near-term monetary support from the PBOC [People's Bank of China]. Now, perversely, a weaker number may be more supportive for risk and of growth expectations through monetary support. We're of the view that support from the PBOC will likely be more targeted and not broad based, and therefore rate cuts are not clearly in train as markets do expect. However, the data will be an important focus and a strong start to the week.
Secondly, against this very complicated backdrop for inflation, growth, monetary policy dynamic, a trade off in many respects; the UK is back in focus next week. We get inflation print for September on Wednesday and retail sales on Friday, also for September. Inflation is expected to stay at 3.2% year on year, still in letter-writing territory for the Bank of England, although the governor is only required to respond to the chancellor every three months. Driver shortages and global supply chain disruptions are clearly intensifying in the UK as demand ramps up heading into the Christmas period and I guess it's likely that we continue to see headlines in this regard. Retail sales also face disruptions from supply chains, as availability is impacted and markets are expecting a further decline in retail sales in September. From a policy perspective, we've heard from the new MPC [Monetary Policy Committee] member Catherine Mann this week, who said that she can wait on tightening rates, but the supply concerns are likely to last longer, adding to the complexity. Indeed, sentiment towards sterling, which is currently dominated by the repricing of the front end of the yield curve, will also face lots of potential noise around the renegotiation of the Northern Ireland Protocol over coming weeks. These negotiating tactics from the EU, such as the threat of cutting off energy supplies, won't help sentiment or domestic energy price concerns in the near term. In short, elevated inflation and disappointing retail sales activity provide a complex backdrop for the UK and for sterling.
Lastly, we have global flash PMI data for October on Friday. Perhaps the most complex of backdrops this data series has faced in its relatively short history; the combination of inflation, supply disruptions, onward distribution problems and labour shortages all make reading the headlines very difficult, certainly in terms of their gauge on future activity. However, going forward, we see a return to a more distinct global differentiation, with Asia increasingly coming back online and opening up post Delta, and with lower inflation pressures, importantly there. In EM and LATAM in particular, higher rates and the pass through into business sentiment and consumer sentiment is something of a focus going forward. And whether US insulation from some of the energy market distortions and a relatively easy monetary and fiscal policy, certainly relative to wider DM, plays a role. But essentially, it's how global growth expectations are impacted by the current inflation dynamic and how they differ globally. We continue to expect US growth and rate differentials to continue to widen relative to DM. The PMIs may be a current barometer into that progress with important implications for the dollar.
A fascinating week ahead and lots to keep an eye on. In the meantime, though, as mentioned, the epic battle between emerging and developed economies commences this weekend with the T20 Cricket World Cup. But outside of the cricket, what else have you got your eye on, Neil?
Absolutely, yes, thanks Matt. It's a return of the Premiership after the international break and the Nations League final, France crowned champions of the nations there. But really for me, the focus for this weekend is all about the start of the ICC T20 World Cup cricket tournament. We've got India as the favourites with England, Australia and the West Indies firmly behind them and some relative newcomers to the world of cricket in Oman, Papua New Guinea and Namibia. It'll be a fascinating affair and we look forward to that very much.
Absolutely. Some age old rivalries in play during the course of the tournament and perhaps the beginning of some new ones as well. Thank you very much, Neil, as ever, for guiding us through the week ahead. We look forward to catching up with you again next week.
Pleasure, thank you very much Matt.
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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