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. Good to have you here with us again.

Neil Staines

Hi Matt, great to be here.

Matt Jones

So it's the 5th of November, and in the UK, it's Guy Fawkes Night. Fireworks Night celebrations will be happening across the country as the UK celebrates a notable point in English history. And to paraphrase the famous song that goes along with the celebrations: remember, remember, the 5th of November, interest rate hikes - or not? So as we look across the week ahead, a lot of focus on central banks. Perhaps you could share your thoughts with us.

Neil Staines

Yes, absolutely, Matt, wonderful. I think after the explosive repricing and subsequent volatility at the front end of the developed market rates base over the last couple of weeks, the focus will remain very attentive to central bank narrative and to the pricing around inflation and rates driven by the growth data and the sentiment over coming weeks.

I'll start today with the UK, with Bank of England policy very much front of mind, after Bailey set off some fireworks of his own a day early, or in fact, perhaps it was more of a monetary gunpowder plot than fireworks, but interesting nonetheless. Regular listeners or readers will know that we were not comfortable with the prospect of Bank of England rate lift-off in November due to a number of factors: the labour market and furlough uncertainty, and not to mention the unknown demand impacts from energy price hikes and fiscal tightening. Not to mention a touch of good old fashioned inflation itself. It's likely that this point, the impact on growth of inflation and fiscal tightening, was the fact that ultimately delayed monetary tightening, for now at least; there is still plenty of pricing in the curve and still a commitment from the Bank of England to raise rates somewhat over the coming months. Though conditional projections of the Bank of England show rate hikes now bringing inflation below target at the forecast horizon, which is conditional on market rate hikes. So I think that's an important point to note, this interaction between fiscal tightening, the tightening of monetary policy and the impact on growth that we see. This week, we have Q3 GDP. Now that might give markets more clarity around the momentum into Q4 and thus the Bank of England and the markets, the assessment of what rate hike urgency is going forward. We maintain February as our preferred lift-off date in the UK.

In the US, we get CPI data for October, and we expect the Powell renomination process to conclude, both of which we see as potential factors to drive a more hawkish inflation narrative in the US. As we noted in this week's blog, the Fed is on many measures insufficiently hawkish, but it is more hawkish than the markets. This is the exact opposite of what we see in the rest of the developed market space. Now, the events of the week ahead have potential to reprice rates and risk premium in the front end in the US, at least relative to its peers.

And then lastly, focus will return back to Europe. Front end rate repricing in the European curve is tempered over recent days. Growth continues to look relatively vulnerable in the near term as supply chains and continued China growth moderation continue to hamper the near-term manufacturing output trajectory at least. Now we get Sentix investor confidence for November - that's a European metric, maybe not tier one, but certainly historically well correlated to eurozone GDP - and we get German ZEW for November on Tuesday. Both will be watched closely for clues on supply and demand dynamics in Europe. And lastly, with some signs of rising Covid cases and weak booster jab take up, it's possible that Covid rates and potentially even tighter restrictions become a factor in Europe. This is something that would clearly exacerbate the current moderation in economic momentum. Hopefully, this is not the case, but we remain cautious on European growth and rates in general and will continue to favour a lower euro/dollar.

Matt Jones

Lots to look forward to in the week ahead. In the meantime, we are absolutely spoilt for choice for the weekend. So why don't you share your thoughts over Saturday and Sunday?

Neil Staines

Absolutely, yes, thanks, Matt. There's plenty of potential for fireworks in the world of sport this weekend. The Formula One travels to Mexico and with Max 13 points ahead, Lewis really does have his work cut out as we go into South America for the next two weeks. Football: the Premiership returns this week with the Manchester derby. That will be the big focus ahead of another international break for World Cup qualifiers. We also have the T20 cricket, the final round games before the semi-finals. It looks like England might squeak through as top of the group, but they play South Africa in a crunch match on Saturday. It's also the West Indies vs. Australia, and although the Windies are out, one of the greatest T20 batsmen of all time, Gayle, might have a say on who goes through to the semi-finals. In the other group New Zealand and Pakistan look all but done for their place in the semi-finals, so that is fascinating going forward. But finally, for me, really, I think the excitement comes from the return of the rugby. So England are back in action on the weekend against Tonga and undoubtedly the game of the weekend, Wales vs. South Africa.

Matt Jones

Absolutely, very much looking forward to Wales vs. South Africa myself. Well, Neil, thank you very much for joining us and I look forward to catching up with you again next week.

Neil Staines

Been a pleasure. 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".

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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