In this episode:
- US Macro Outlook and Trade Negotiations
- Europe: ECB Decision and Growth Prospects
- UK: Data Watch and Policy Pause
US Macro Outlook and Trade Negotiations
- Persistent Volatility: Despite recent cooling, US markets will likely remain highly volatile around key trade negotiation deadlines.
- Tariff Effects on Inflation: May CPI expected to tick up slightly, driven by tariffs, but underlying disinflationary forces remain intact.
- Fed in Focus: Data, including CPI, PPI, and jobless claims, will likely shape expectations in the FOMC blackout period.
Europe: ECB Decision and Growth Prospects
- ECB Reaches Neutral: ECB cuts rates by 25 bps to 2%, the middle of its neutral range, suggesting policy tightening might be over.
- Inflation Stabilizing: Forecasts show inflation at 2% for 2025 and 2027, with a transient dip below target in 2026.
- Growth Outlook Brightens: Growth forecasts improve, with a strong labor market and fiscal stimulus in Germany supporting optimism.
UK: Data Watch and Policy Pause
- Muted Data Impact: Unemployment expected to rise slightly; April GDP likely shows a mild contraction, reinforcing growth concerns.
- Rate Cut Prospects: Markets hesitant on rate cuts, but high taxes, tight fiscal policy, and global uncertainty may accelerate cuts in H2 2025.
- Monetary Pause: The MPC blackout period begins, with the June 19 meeting expected to maintain policy rates.
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 it's been a very eventful week for the US and that's going to culminate in a very important US employment report slightly after this recording. So what are we looking for in the US this week? On and off the data calendar. Perhaps outside of the very public and presidential arguments.
Neil Staines
Yeah, good question, Matt. Thanks very much. Interestingly, the Tesla price action this week following the Trump-Musk confrontation and then cooling was very similar to that of US equity indices after the Liberation Day collapse and subsequent 90-day pause rally, which highlights what we're facing in terms of elevated uncertainty and heightened baseline volatility in global financial markets at the moment. What is perhaps surprising from our perspective is that there is very little priced in terms of volatility around that 90-day deadline. Markets still remain very sanguine about the risks of an elevation back to those Liberation Day levels, and markets still remain very sanguine about the risks around that 90-day deadline.
Next week, the focus is going to return to trade negotiations, particularly in Japan, where Akazawa and his team are currently in the US and will be so until Sunday. We may potentially get some announcement over the weekend. As far as India is concerned, as we understand it, they are in advanced stages of the negotiations. One focal point for us would be on the existence of an agreement or discussions on currency. This is certainly something that has been brought back into focus by the Treasury comments this week, suggesting that the Bank of Japan should hike rates to support the currency, and as we understand it, this is certainly part of the trade negotiations.
Next week, we’ll also focus back on the data with the May CPI print on Wednesday. Markets are expecting the headline rate to tick up from 2.3 to 2.5, and the core level to tick up to 2.9 from 2.8, likely showing some tariff effect there, but nothing too sinister at this stage—something that we still see as an underlying disinflationary process outside of that tariff impact. We also get PPI on Thursday and jobless claims, which have been edging up recently. And even though they’re still at historically low levels, they are starting to raise an eyebrow.
As always, we'll be watching the headlines this week, although likely a little less exciting than this week—but important nonetheless, particularly as we head into the Fed’s blackout period ahead of the FOMC meeting on the 18th, where this week’s data is likely to play a critical role.
Matt Jones
So switching to Europe this week, we had an important decision from the ECB. So how are we thinking about Europe at the current juncture?
Neil Staines
Absolutely. I think retrospectively this will be viewed as a very important decision. The ECB cut rates by 25 basis points to 2%. That was the seventh consecutive 25 basis point cut and the eighth in total, bringing us to a 2% level. Importantly, that is the middle of the neutral rate that was published by the ECB earlier this year. Luard also noted that this concept of neutral is predicated on the absence of a shock. Given that, and the fact that inflation projections now stabilize around the 2% target, it seems likely that the ECB is just about done, although it’s possible there may be a further adjustment in September.
The updated forecasts show inflation at 2% this year and in 2027, although slightly below target at 1.6% in 2026. That’s a function of energy and euro adjustments and therefore likely transient. On the growth front, the forecasts show 0.9% in 2025, rising to 1.3% in 2027. Throughout that period, while there is some uncertainty and downside risks in the short term, in the medium term those risks have shifted a little more to the upside, along with the narrative of a strong labor market, rising real incomes, strong private sector balance sheets, and increased infrastructure stimulus across the Eurozone—most notably in Germany. All of this bodes well for Europe and the euro going forward.
Next week also brings comments from Christine Lagarde and Isabelle Schnabel, and those will be watched very closely for any further guidance on the rate path going forward.
Slightly further afield, after the surprise to some of the election of the PIS candidates in the presidential election earlier this month, Prime Minister Donald Tusk has called for a vote of no confidence, which will take place on Wednesday. There are some slight complications in this political and possibly even fiscal backdrop for Poland. While Tusk is expected to win the vote of no confidence, it brings some focus back onto the uncertainties after what has been a very strong performance for currencies and equities this year. So it’s something further to look out for across Europe this week.
Matt Jones
And finally after what was perhaps a surprise win for the government in a Scottish by-election This week, UK comes back into focus on the data front. So what are we looking out for?
Neil Staines
Absolutely. Again, the MPC moves into their blackout period on Monday ahead of the June 19th Bank of England meeting, at which there will be no MPR or monetary policy report, no press conference, and likely no change in the policy rate. However, on Tuesday we do get the unemployment rate, and that’s expected to edge up to 4.6% for April. On Thursday we get the GDP print, also for April, and that’s expected to show a slight dip after the mild positive we saw in March. This will come alongside some BRC sales data, RICS house price data, and Bank of England inflation expectations data, all of which are relevant for the monetary policy debate going forward.
Now, markets have been reluctant to price anything but a very shallow path of rate cuts, although the terminal rate being priced is somewhere around 3.5%. From our perspective, high taxes, high rates, and high global uncertainty, as well as the likelihood of further fiscal tightening ahead, mean that for us the risks are weighted towards faster rate cuts through the second half of 2025 as monetary policy loosening balances the tighter fiscal stance against a backdrop of slowing growth.
It’s a big week for the UK and essentially a monetary policy pause between the ECB this week and the Bank of England and the Fed the week after next—although still plenty to look out for.
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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