In this episode:
- Fiscal Policy – Europe and the UK
- ECB and European Outlook
- US Jobs and Monetary Policy
Fiscal Policy – Europe and the UK
- France faces a confidence vote after parliament rejected a fiscally prudent budget, raising the risk of watered-down deficit reduction.
- UK fiscal plans remain unclear, but political realities make tax hikes more likely than spending cuts.
- Both countries felt pressure from bond vigilantes, with curve steepening spilling into broader global markets.
ECB and European Outlook
- Inflation in Europe is now at target, with growth stabilising across the ECB’s forecast horizon.
- Peripheral economies are outperforming the core, while Germany shows troubling weakness.
- With policy at neutral, the ECB is likely comfortable for now, though tariff impacts and Governing Council divisions will be closely monitored.
US Jobs and Monetary Policy
- US growth is holding below equilibrium but resilient enough to justify insurance cuts toward a 3% neutral rate.
- Labor market moderation is partly due to reduced immigration, limiting consumption but offset by strong AI-related capital spending.
- The September payrolls report and CPI release will be pivotal in shaping expectations for the Fed’s rate trajectory.
Transcript (AI Generated)
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, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.
Welcome back, Neil. It's great to have you here with us again.
Neil Staines
Thank you very much Matt. It's great to be here.
Matt Jones
Now, politics and fiscal policy have been prominent in market sentiment this week with curve steepening very much a clear theme. So how are we thinking about fiscal policy this week, and what are the focal points?
Neil Staines
Thanks very much, Matt. While the US, and by extension the global economic trajectories, are under clear scrutiny at the moment, this week's emphasis was clearly on the fiscal side. In Europe, this was likely the most acute, with the failure of the French Parliament to agree on the more prudent, fiscally responsible budget proposal of the Bayrou government. The impasse ultimately resulted in a vote of no confidence in government, and that vote will likely take place on Monday. This is expected to hold, effectively bringing down the government. Now, while the most likely outcome is that Macron instills a new Prime Minister, there is now a greater chance that deficit reduction measures are, at best, watered down in the new budget.
So a lot to look out for there, not just on Monday but over the coming weeks and months. In the UK, the state of the public finances has been dominant with the ongoing uncertainty about the Chancellor's plan to fill the fiscal black hole. Political issues this week make it more likely, from our perspective, that it will be via tax hikes and not spending cuts. So both the UK and France have felt the impact of bond vigilantes this week, as the curve has steepened quite aggressively, particularly at the start of the week, with some spillover into other global markets. With a new PM in France, and a UK budget delayed until November 26th, this fiscal concern and market uncertainty is not going away anytime soon.
Matt Jones
Monetary policy does come back to the fore this week with the ECB. So what are we watching for from Europe?
Neil Staines
It certainly does. As you say, it's a big week for Europe, with the fiscal focus at the start of the week and monetary policy coming back after the summer break from the ECB. The backdrop is complicated intra-Europe at the moment, with the periphery continuing to outperform the core.
The French troubles we have already highlighted, and the German macro data has been very troublingly weak of late. However, at the aggregate level, inflation is at target now, and through the ECB’s forecast horizon growth has stabilized. Lower rates continue to support growth, and low inflation continues to support real wage growth across Europe.
Indeed, European growth is expected to narrow significantly relative to the US over the coming quarters and even years. The ECB will look at this backdrop in the context of policy at their estimate of neutral and likely will be quite comfortable. The split on the governing council and the accompanying narrative, especially around the tariff impact, will be closely watched.
But for now there is little to see from an incremental monetary policy perspective from the ECB.
Matt Jones
Of course, that leaves us with the US and the all-important US jobs report, which comes just after we go to air. So how are we thinking about the US, and what are we watching for next week?
Neil Staines
Thanks, Matt. It's a huge payroll number this afternoon, and continuing focus on the growth and inflation narrative in the US will be very important. We discussed this further in this week's blog, but ultimately markets seek clarity about the Fed's rate path.
Overall, more composite data show that the US economy is doing fine, but below equilibrium levels. This remains our core macro view. This ultimately enables insurance cuts from the Fed, seeing as they are in restrictive territory towards that neutral level of 3%.
Something more concerning on growth would bring a bigger reaction from the Fed, and certainly more than is currently priced, but data for now do not support this more aggressive decline in US activity. Going forward, the moderation in the labor market has come in conjunction with reduced immigration, or a reduction in the labor supply. A lower participation rate or lower workforce will ultimately lead to a lower personal consumption contribution to GDP. At the moment, that is being countered by the increased CapEx spend in the AI infrastructure space. But essentially, this highlights the complexity of the monetary policy debate at the moment—the contributing factors to GDP and the extrapolated implications for that monetary policy trajectory.
The importance of payrolls, and next week's CPI print on September 17th, FOMC remains huge, as markets continue to digest the implications for the Fed path going forward.
Matt Jones
Fantastic. Thank you for joining us once again and outlining your thoughts on the week ahead. I look forward to catching up with you again next time.
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