Monetary Policy Insights_Key Data and Expectations from the US_Europe_UK

In this episode:

  • Federal Reserve: Policy on Hold but Uncertainty Looms
  • European Central Bank: Cutting Rates with a Cautious Outlook
  • Bank of England: Rate Cuts Expected Amid Economic Slowdown

Federal Reserve: Policy on Hold but Uncertainty Looms

  • The Fed maintained its target rate at 4.25%-4.50% and signaled a balanced approach to managing inflation and employment risks.
  • Key U.S. economic data next week, including ISM, JOLTS, ADP, and non-farm payrolls, will be critical for shaping future policy direction.
  • The impact of potential Trump administration policies—tariffs, immigration, deregulation, and fiscal changes—adds another layer of economic uncertainty.

European Central Bank: Cutting Rates with a Cautious Outlook

  • The ECB cut rates by 25 basis points to 2.75%, reinforcing a gradual policy adjustment while monitoring inflation and growth risks.
  • President Lagarde hinted at potential policy shifts depending on inflation and economic developments, with rate stance labels possibly changing as early as March.
  • The Eurozone's economic outlook remains tied to both domestic inflation data and external factors like U.S. fiscal policy.

Bank of England: Rate Cuts Expected Amid Economic Slowdown

  • The Bank of England is set to meet next week, with markets nearly fully pricing in a 25 basis point rate cut.
  • Economic momentum in the UK remains weak, with fiscal policies—such as employer National Insurance contribution hikes—further weighing on growth.
  • Sterling could face downward pressure, particularly against the euro and dollar, as looser monetary policy plays out through 2025.

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

So it's been a big week for central banks this week. And next week looks set to be a big week for data. So maybe starting in the US, how are we looking at the incoming data calendar and how it interacts with the monetary policy message from the Fed?

Neil Staines

Yeah, thanks very much. It's a great question, Matt. We discuss, the Fed and the ECB in more detail, in this week's blog. But essentially The Fed left rates on hold at four and a quarter to four and a half target rate as expected and also as expected Powell laid out a more balanced narrative on the risks around achieving the dual policy objectives over, coming months.

We have a couple of thoughts in this regard. While the statement removed the sentence, inflation has made progress towards the committee's 2 percent objective, Powell was clear that this change, was a language tidy up. And did not have any policy inference, but also reiterated the dovish policy bias and the assessment that the current policy setting is meaningfully restrictive.

The core message, however, and one we want to emphasize, around the Trump administration's, economic and fiscal policies with tariffs and immigration on one side, the more inflationary impacts and deregulation and fiscal consolidation on a more disinflationary side the core Trump policies are really going to be dominant from a macro perspective going forward.

Next week is a huge week for the US. We get Manufacturing and Services ISM for January, we get JOLTS and ADP, and of course, the non farm payrolls. On a headline basis, we're expecting 150,000 from payrolls next week.

Now if we put that into context, 190,000 is somewhere in the region of where we expect the natural rate or the underlying rate of employment growth in the US at the moment on around 150,000 a month being the break even rate at which the unemployment rate likely stays where it is. So above 150, the unemployment rates pressure to the downside and below to the top side.

On that basis, with expectations at 150, it's a key month. And now Trump's government has announced that there will be some job freezes in the government, department, and that has accounted for around 40,000 on average, over the past year. And that really puts into perspective the uncertainties that we face going forward, even if January, may not be a fully, Trump dominated month.

On top of that It's another huge week for earnings. We get Palantir, PayPal, Google, Uber, Qualcomm, Amazon, Ford and AMD. The Fed pause is contingent on clarity over Trump policies, but next week's data could make that wait slightly more uncomfortable for the Fed.

Matt Jones

It was also a big week for Europe this week with the ECB cutting rates. How does Europe fit into the global macro narrative at the moment?

Neil Staines

Yeah, great question again, Matt. The ECB cut rates 25 basis points to 2.75 percent this week and maintained the underlying narrative of a clear direction of travel on rates.

Now the ECB has remained confident that inflation will stabilise around target in the medium term on a sustainable basis while risks to growth remain to the downside. Inflation risks are more balanced and indeed in communicating a more balanced, message, President Lagarde outlined scenarios whereby policy could take a different path as a function of inflation and growth risks.

Now, while Spanish core inflation yesterday and German state data, this morning showed some downside risks, on the inflation front, on the growth front. Legard highlighted some nascent positives, coming from the strong labour market, rising real wages, increasingly, resilient corporate profits, more affordable credit, and of course, expectations, of an increased contribution of net exports as global growth recovers throughout the year.

Post the press conference release. There was the comment from the ECB that they may drop the restrictive label on the rate stance as soon as March, and that's very interesting. It brings the focus back to terminal rate expectations around, , the ECB, a more cautious approach to rates beyond March, where rates will be at two and a half percent may warrant reconsiderations for those with terminal rate expectations at 1.5 percent or even 1.75 percent as are relatively common, , in the market. Now, while, Eurozone CPI print for January will likely be very keenly watched on Monday, as we saw in the Euro last night, in response to a Trump comment on tariffs, US fiscal and economic policy is likely also a dominant factor for Europe.

Matt Jones

Now Finally, the UK and next week we get the Bank of England. How are we thinking about the UK economy and prospective UK rate trajectory?

Neil Staines

Yeah, absolutely. The, the MPC meet next Wednesday and Thursday. Now it's not a monetary policy report month, and thus , we can only expect a decision and a statement and not, the additional information that we have from the policy report and press conference. However, markets are almost fully priced for a 25 basis point cut next week. The first of many this year from our perspective, as what we see as a likely misjudged, employer, national insurance contribution hike, adding further, to a waning UK economic momentum.

Current tinkering around the edges with departmental efficiency gains, may put a plaster over the fiscal rule break, in the out years, but will do little to boost confidence now. Looser monetary policy through 2025, especially relative to expectations should weigh on sterling and for us more likely versus the euro and versus the dollar. Markets are still only pricing 75 basis points for the full year, and anything that looks like fiscal tightening in the March budget, could see rate cut expectations move significantly from our perspective. it's going to be an interesting week for the UK, potentially the start of a bigger global focus on UK policy and on UK assets.

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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