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. Great to have you with us again.

Neil Staines

Thanks very much, Matt. Lovely to be here.

Matt Jones

So as China embarks on a weeklong holiday, attention is going to be drawn elsewhere from a macro perspective. Looking into the week ahead, what haveyou got your eye on?

Neil Staines

Yes, absolutely. There are a few things that we're going to be looking at very closely this week.

In this week's blog, we discussed the increased focus on central bank, or monetary policy, divergence, if you will, where inflation and growth dynamics have added pressure on policymakers to communicate the expected rate paths. Now, the ECB Forum on Central Banking from Sintra this week brought this into stark focus with the heads of the Fed, the ECB, the Bank of England and the Bank of Japan in Powell, Lagarde, Bailey and Kuroda all around one metaphorical table and really laid bare the sharp divergence over the coming years that we're going to see from global monetary policy. In short, the Fed dots show a median rate of 1.75% by the end of 2024, broadly where US rates were pre-crisis. But we expect ECB rates to be unchanged by that period. If we add the fact that US growth is currently above pre-crisis level -inflation's above target and all but reached our 'substantial further progress' - then US policy normalisation does make sense. In Europe, Lagarded stated at Sintra that the eurozone growth rate will reach pre-crisis level by the end of the year, but pre-crisis rates in the eurozone, where they currently are, -0.5%. So the US on this comparison has significantly looser monetary policy relative to pre-crisis levels, and therefore we think this significant monetary divergence seems likely. And I think it is consequential in financial markets.

This week, that theme is going to be further highlighted because we have Australia and New Zealand monetary policy meetings now. Now, the RBA base rate is on hold until 2024 under the yield curve control target, and the QE taper has been fixed until February in light of the resurgent covid cases. The RBNZ, however, are expected to hike 25 basis points on Wednesday and a further four hikes of 25 basis points over the next year or so. So a clear divergence there, and I think that's going to draw attention to divergences elsewhere.

Secondly, politics and geopolitics will remain an acute focus for markets next week. In the US, the stopgap funding bill has passed this week; that means that government shutdowns are - at least temporarily - averted, but the debt ceiling remains a factor that must be resolved by 18th October under Yellen's calculations. Now, further factional disputes from within the Democratic Party continue to gridlock the Biden economic agenda; that's also a factor that markets will pay attention to and how that gets resolved. That's very important to the absolute number as far as stimulus is concerned and the likelihood of getting there any time soon. In the UK, amid continued energy price worries and fuel distribution problems, Sunday sees the start of the Conservative Party conference from Manchester, and no doubt Boris Johnson will outline a clear plan out of all the concerns. We also expect an intensification of the talks over the Northern Ireland Protocol amid heightened tensions with France over fishing rights that threaten escalation. And that's not to mention the rest of the very complex global geopolitical backdrop.

And finally, everyone's favourite data point is back at the end of the week. Friday sees the US employment report for September. Now the September FOMC gave as clear a message as possible on that Fed tapering is coming in November - contingent on substantial further progress towards its maximum employment goal, that for Powell is all but met. Now, I think that means that the bar is very low. But markets will still keenly await confirmation. Market expectation for the payroll gains are around the half a million mark and a 5.1% unemployment rate. That would be comfortably sufficient, we think, but we still want to wait and see. The markets will be very keen to focus on the numbers as they come out, and that's at 1:30pm on Friday.

Matt Jones

Thank you, Neil, a varied collection of points to be looking out for in the next week. Also interesting to note, of course, the Conservative Party conference happening in Manchester next week - I note that London Cocktail Week starts next week but actually lasts a month. Obviously I wouldn't want to imply anything there. But looking at the weekend, what else have you got your eye on outside of markets?

Neil Staines

Yes, absolutely, thanks Matt. I think there are a couple of highlights this week after some of the disappointments of last weekend, what with Europe's Ryder Cup performance and Anthony Joshua's loss in the heavyweight championships. Liverpool vs. Manchester City is a big focus. South Africa vs. New Zealand in the rugby also another focus. But ultimately this week is probably about going out and being a spectator outdoors. The London Marathon takes place this weekend. That promises to be a fascinating spectacle, as it always is, and the weather looks like it's going to hold up quite well for it. And then clearly, the new James Bond film is going to be a big attraction. London Cocktail Week, Japan Week and Oktoberfest mean there's plenty of food and drink to accompany all those.

Matt Jones

Thank you, Neil. That is quite the list of potential activities and I think the key there would be trying to come out of it shaken, but not stirred. Well, thank you once again, Neil, for joining us and outlining your thoughts, and we look forward very much to catching up with you again next week.

Neil Staines

It's 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".


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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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