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.
Thanks, Matt. Great to be here.
After last week's podcast, Neil, I don't know whether you had a chance to get out and about as we discussed. I did, however, manage to to watch the London Marathon. Admittedly, not all of it, but it was great to see, of course, both Charlotte Perdue and Phil Sesemann finishing in top ten for a good result for British runners in the London Marathon. I think it's fair to say, though, that the Bank of England may not be placing quite so well at the moment. Perhaps you can share your thoughts on the UK.
Yes, absolutely, thanks Matt. The UK will come back into a more acute focus next week with a host of Bank of England speakers and the August employment report. In many respects, the UK is a key barometer of central bank reaction function to the acute, likely transient, cost-push inflation pressures at play in the global economy at the moment. And the Bank of England are under extreme pressure, really, to defend the primacy and credibility of their inflation target with surging prices. Natural gas and energy price shock, global and domestic supply chain disruptions, important for the UK, and acute skills shortages and a labour mismatch essentially driving up wage pressures. Now CPI rose to 3.2% year on year in August - that's in letter-writing territory for the Bank of England, where the Governor is obliged to pen an open letter to the Chancellor to explain how, why and what he's going to do about the miss. So essentially, the Bank of England see inflation at 4% by year end and then back to the 2% target over the medium term, although the risks are to the top side.
And the Bank of England is also very cautious of jumping the gun. I think this is the critical part here and why the Bank of England is in such a difficult position. At the same point in time that we have such acute inflation pressures, we get the end of furlough, which risks a jump or certainly a destabilisation in the unemployment rate, and that's unlikely to provide a clear picture this side of year end. We have the end of the uptick in, or the uplift in, Universal Credit, an increase in National Insurance for the Health and Social Care Levy, an increase in corporate tax and not to mention post-Brexit change in trading conditions and even the end of the QE programme in December. So, all of this really leaves a very uncertain demand/employment/inflation dilemma for the Bank of England. In our view, it's very unlikely that there will be any monetary tightening this year. The Bank of England may even be hoping for some external relief so as not to force them to risk turning a near-term economic stumble into a fall. It's certainly a delicate balance for the Bank of England, not just for the remainder of 2021, but likely well into 2022.
Secondly, the focus stays on inflation with the US CPI print for September on Wednesday. From our perspective, the risks are significantly more balanced in the US, we see a self-sufficiency as essentially having a much greater insulation for the US from the energy price rises. The delta wave and global supply disruption have come simultaneously in the US, and they've limited both supply and demand, albeit leaving an underlying level of activity that is still quite strong. And wage growth has been accompanied by productivity gains; in fact, it could certainly be said that the US is experiencing a good inflation.
Wednesday also brings FOMC minutes, and they're likely to give a further greenlight for the start of the normalisation process in the US; a gradual taper in November. The key focus on the minutes will be on whether what the dispersion of views is, whether there were any dissents or any figures around the pace of the taper, particularly confirmation about whether or not it is a per month or per meeting taper, and any heightened concern about the persistence of inflation or global supply chain disruptions.Though ultimately we continue to see a backdrop for greater monetary and growth divergence in favour of the US and of the dollar over coming months.
And then lastly, on the flip side, there are also a lot of ECB speakers next week. We expect them to continue to push back on the ECB rate hike expectations, both in terms of markets pre-empting hikes ahead of an agreement on the replacement, or a bridge, from PEPP to the traditional QE programme and where that stands in terms of being able to manage the credit divergence or the difference in credit spreads across the regions of the eurozone, also to avoid market tightening of financial conditions into a China slowdown and global supply backlog, and not to mention a structural inflation shortfall that the ECB won't want the market to get ahead of. All of these factors lead us to maintain the view that further euro downside in FX markets is in train.
Thank you, Neil. A fascinating blend of points to be looking out for in the week ahead. In the meantime, as ever, we have the weekend ahead of us, which I'm sure all of us are very much looking forward to. What in particular have you got your eye on this weekend, Neil?
Yes, absolutely Matt. Another another fascinating weekend. Internationals - football internationals - are back this weekend with World Cup Qualifiers. Scotland, England, Northern Ireland and Wales all in action. And we also have the final of the Nations League - hoping you don't ask me to explain how we get to the final stages - but that will be contested between Spain and France after a spectacular comeback from France in the semi-finals at the back end of this week. Formula One moves to Turkey in replacement for the cancelled Japan Grand Prix with just a two point lead for Hamilton going into this event; this really is a season that is a movie in the making. Thirdly, we get the third, and hopefully final, Fury vs. Wilder World Heavyweight title fight, and this sets up the distant prospect of a Fury-AJ fight at some point in the back end of next year. And if none of those points take your fancy, of course we get the second crack at London Cocktail Week.
Absolutely, we can all drink to that. Well, thank you very much, Neil, as ever, for sharing your thoughts with us. We look forward to catching up with you again next week.
It's a pleasure. Thanks, Matt.
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