In this episode:
- UK, Australia & New Zealand: Easing Biases and Fiscal Shifts
- US: Hard vs. Soft Data, Fiscal Clarity, and Tariff Tensions
- Trade Risk: Undervalued Threats Ahead of the Tariff Deadline
UK, Australia & New Zealand: Easing Biases and Fiscal Shifts
- Bank of England’s tone has shifted decisively toward cuts, with Governor Bailey citing increased slack and uncertainty, and new MPC member Taylor concerned about inflation undershooting.
- UK fiscal tightening post-election, particularly welfare reversals, may necessitate more monetary easing than currently priced by markets.
- Australia and New Zealand diverge in pace: the RBA is expected to cut rates 25bps amid soft growth, while the RBNZ is set to hold steady after aggressive earlier cuts.
US: Hard vs. Soft Data, Fiscal Clarity, and Tariff Tensions
- Conflicting US data clouds the policy outlook, with hard-soft divergences in employment and business surveys likely keeping the Fed on hold for now.
- Fiscal uncertainty has improved following the passage of the “big beautiful bill,” which provides clarity on the debt ceiling heading into summer.
- Tariff risk is front and centre, with markets underpricing the potential fallout ahead of the July 9 tariff deadline and looming Fed commentary.
Trade Risk: Undervalued Threats Ahead of the Tariff Deadline
- Markets are complacent about trade risk, despite reports of Trump planning to send tariff letters to up to 12 countries by July 9.
- Negotiations look strained, with the EU, Japan, and South Korea all showing signs of resistance to US demands, particularly on agriculture and concessions.
- Even in a quiet data week, cross-asset markets may react sharply, as FX, rates, credit, and equities face unpriced trade policy risk.
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
After a rather hectic week for data and announcements, next week does look to be a little quieter, at least on the data front. So, what are we looking out for from a global perspective?
Neil Staines
Yeah, thanks Matt. It’s certainly a little quieter next week from a data perspective, but there are a couple of focal points we’ll be watching. Over the weekend, Governor Bailey speaks. He’s been very vocal recently in terms of a shift in the Bank of England’s narrative towards rate cuts in the second half. Last week, he suggested there is strong evidence of slack opening up in recent months, and that uncertainty and weak demand are hitting firms' investment, comments that were echoed by new MPC member Taylor, who said he’s worried inflation could undershoot the Bank of England’s target.
If we add to this the U-turn on welfare and the increased need, therefore, for tighter fiscal policy, we continue to see UK rate cuts coming in more than markets currently have priced for the remainder of the second half of this year, as monetary policy needs to adjust to the incoming fiscal tightening.
Next week, we also have the RBA on Tuesday. They are expected to cut by 25 basis points after a period of moderate economic and price growth over recent months. Global trade uncertainty, China in particular, has taken some of the heat out of the Australian economy, despite some gains in commodities.
We also hear from the RBNZ, who are at a much more mature stage of their cutting cycle, having reduced rates by 225 basis points since mid-2024. They are, therefore, expected to leave rates unchanged at the current level of 3.25%.
The focus in both cases is likely to be on the economic narrative and any inference for rate moves going forward.
Outside of that, we also get China’s CPI and PPI on Wednesday and Eurozone Sentix investor confidence on Monday. These are also likely to be closely watched, but it’s likely that the US continues to dominate global market action next week.
Matt Jones
Now, it has been a busy and US-focused week. So, what are we taking into next week, and how does this shift the focus?
Neil Staines
Yeah, that’s a great question, Matt. As we discussed further in this week’s blog, there are three key, and not mutually exclusive, dynamics in the US at the moment.
The first is the hard versus soft data debate, and what that means for the US economic trajectory. This week, we’ve seen JOLTS data, which highlighted issues with immigration at the headline level of job openings. We’ve seen the ADP private sector employment report, which raised some question marks over its breakdown. And the non-farm payroll print, brought forward due to the July 4th holiday, leaves question marks over seasonal adjustment.
With the ISM continuing to emphasise the hard versus soft divergence, the data presents a complicated picture for policy going forward, but one which likely leaves the Fed on hold for now, much to the chagrin of Donald Trump and the current US administration.
The second point is on the fiscal side. Again, as we mention in this week’s blog, the “big beautiful bill” was passed, giving some clarity, especially around the debt ceiling, over the summer. That removes some uncertainty.
And thirdly, tariffs. Ahead of the fast-approaching July 9th deadline, the end of the 90-day delay, we’ll hear from a number of Fed speakers next week. They’ll be closely watched for their interpretation of this week’s data and/or their pushback to Trump’s pressure on rates and/or tariff developments.
With little data next week to move the dial, markets will be closely watching the headlines.
Matt Jones
Let’s drill into that a little more. So, how are we looking at the tariff debate going into the July 9th deadline next week?
Neil Staines
Yeah, absolutely. As we go to press, so to speak, we’re expecting a series of letters from Donald Trump to up to 12 nations, dictating their post–July 9th tariff levels, even if those don’t come into effect until August 1st.
While this is undoubtedly a further negotiating tactic, it raises questions around the lack of risk pricing in markets in relation to this trade deadline. We touch on this a bit more in this week’s blog. But it’s not clear that some of the differences can be bridged by Wednesday.
For example, in the EU, it seems they are willing to accept a 10% tariff from the US, but they certainly want some US concessions, which may not be forthcoming. In Japan, they’ve made it clear they cannot accept certain terms, particularly around agriculture. And in South Korea, they’ve openly stated that in some areas, they’re not even close to agreement.
So, despite the lack of economic data next week, with such little risk premium priced into FX, rates, equities, and credit, next week certainly deserves more attention than the data calendar might suggest.
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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