The Bank of England Milestone
The recent events at the Bank of England marked a significant milestone in the evolution of bank rates. Despite an unchanged vote, the split of seven to two and the dovish tone from dissenters signal a potential shift in policy stance. With downward revisions to inflation projections and Governor Bailey's hint at sharper rate cuts, all eyes are on the upcoming data releases, particularly the employment report for March and April. The anticipation is high for the first rate cut, expected in August, with a possibility of an earlier move in June.
Global Economic Outlook
Turning our focus to the global economic trajectory, China and the Eurozone take centre stage. Signs of stabilization in China's property market and the awaited data releases will provide crucial insights into the growth trajectory. In Europe, attention is on Germany's ZEW and Q1 GDP print, along with Sweden's monetary policy deliberations. The narrative of global economic convergence gains momentum, emphasizing a shift from divergence to a more unified economic landscape.
Key Data Releases in the US
Looking ahead to the US data releases, a busy week awaits investors. The NFIB small business sentiment index, retail sales for April, industrial production figures, housing data, and the CPI print for April are among the key events to monitor closely. Market reactions and the Fed's policy stance will be influenced by these data points, especially as inflation trends towards targets, a precursor for potential rate cuts in the US.
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, 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
After what feels like a significant milestone for the Bank of England this week, how are we thinking about the evolution of the bank rate over coming months, and what are we looking out for next week?
Neil Staines
Absolutely. Thanks, Matt, yeah. We expand upon this topic a little more in this week's blog. But I would completely agree and that it does feel like a significant milestone for the Bank of England.
Now, the vote was unchanged, but the split was seven two, as we suggested in last week's podcast. However there was a notable dovish tone throughout not least from Dhingra and Dave Ramsden who dissented on the unchanged call, citing that the bank rate needs to become less restrictive now to enable a smooth and gradual transition in the policy stance, and account for legs in transmission. Something that I think is very interesting at this stage, particularly as we're seeing a slowing of the data. Indeed, Sir Dave Ramsden cited the contact survey which is quoted as being "surprised by weakness in good and in services" in the Q1 data prints.
So I think that's a very relevant and certainly a milestone for policy. The critical point, and what really does make this a milestone is essentially the downward revisions to the inflation projections across the forecast horizon. Now conditioned on market pricing or on the market curve with the Bank of England's inflation projections to see inflation at 1.9% of the two year horizon, and 1.6% at the three-year horizon, sparking the comments in the press conference from Governor Bailey that rates may fall more sharply than markets expect, given this significant undershoot at the forecast horizon. Now that leads us to a very significant focus on the data in coming months, and after what was a stronger GDP print at the end of this week, I will be looking very closely at the employment report next week for March and April. We still stick to our expectations that the first rate cut comes at the next monetary policy report month and that's August on August the first. But there's certainly an outside case for the policy rates to come down in June.
Matt Jones
And what about the global outlook? What are we focused on next week in gauging the global economic trajectory?
Neil Staines
Yeah. Good question again, Matt. When we talk about the global trajectory, we tend to talk about China and the Eurozone in this context, and with signs emerging that China's property downturn and by extension, domestic demand, is bottoming out, the China data will be watched very closely. Now, we get CPI and PPI prints for April on Saturday, before we start the week, at total social financing, also for April, will also be very closely watched just to credit creation within the economy.
And then on Friday we get the full suite of data, industrial production, retail sales, fixed asset investment, and the unemployment rates. So again, a big week for China will be very focused on the trajectory of growth there. Elsewhere in Europe, we get German ZEW and we get the GDP print for Q1. And following on from the 25 basis point cut from the Riksbank this week, we get the minutes. So a little insight into further thinking out of Sweden, with their suggestion of two more cuts this year. More broadly, this brings us back to the concept that we've been discussing often of late about a convergence of the global economy, and away from what had been a common theme amongst market commentators, and that was divergence us strength against the rest of the world weakness. We certainly see a continuation of that narrowing.
Matt Jones
So after a relatively quiet week for US data things get a little busier next week. What do we see as the most significant data releases during the week?
Neil Staines
Yes. Back to a lot of data next week. There's a couple of particular interests. The NFIB small business sentiment index is going to be closely watched.
Now, this is a an index that showed a deterioration in the last month's print, particularly, and perhaps more relevantly, in terms of the subindex on the employment component. So that's something we'll be watching out for to gauge a broader sentiment away from the kind of big company focus that you often get in the US. Indeed, it was interesting to note that Susan Collins from the Fed this week, referenced that the policy rate has likely only recently become restrictive, and therefore there's a lot of tightening that will feed through into the real economy. That's a point that's been made by our Chief Executive Stephen Jen, a number of weeks ago, in terms of how recent effective policy tightening has hit the real economy. So I think that's something to note when we look into the data going forward. We get retail sales for April. Markets are expecting a slightly slower pace from the surprise upside that we saw in the March print. Industrial production for April, housing, we also get existing home sales data, and claims that caused a little bit of a furore this week, where a slight miss emphasized the market sensitivity to downside employment prints in the US. Certainly the Fed policy reaction function has been highlighted by a number of commentaries in that regard. But the big event of the week is going to be the CPI print for April. We're expecting the headline to drop from 3.5 to 3.4 and the core rate from 3.8 to 3.6. Stepping the way to providing sufficient confidence at the Fed that inflation is converging towards targets. A precursor for rate cuts in the US.
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 week.
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