In this week's Podcast
- Central Banks in focus
- Equity Markets & Earnings Season
- The Fed & U.S. Markets
Central Banks in focus
Bank of Japan:
- Rate Hike: Increased rates to 25 basis points, up from zero to 0.1.
- Policy Justification:** Cited improved consumption, rising wages, and escalating prices.
- Impact: Narrowing real rate differentials positively influenced the Yen, causing significant volatility this week.
Bank of England:
- Rate Cut: Reduced rates by 25 basis points to 5%, decided by a narrow 5-4 vote.
- Narrative: Despite the cut, the bank maintained a somewhat hawkish stance due to persistently high services inflation.
- Growth Projections: Official data shows weaker growth than the bank's upgraded forecast for 2024.
- Market Pricing: Another 43 basis points expected by year-end and the possibility of larger rate cuts not ruled out.
- Upcoming Data: Expect limited data from the UK but significant reports from Japan and the RBA.
Equity Markets & Earnings Season
- Q2 Earnings Season: Continuing to dominate global equity markets.
- Performance: Approximately 60% of S&P 500 companies have reported, with a similar percentage beating expectations.
- AI Monetization: Investors are impatient for returns on AI investments.
- Q3 Guidance: Focused on the potential slowdown and recessionary indicators.
- Consumer Names: Reporting from demand-driven companies will be crucial.
- Market Sentiment: Balancing lower yields and duration gains against risk appetite.
The Fed & U.S. Markets
- Fed's Role: Minor changes in statements but a significant shift toward balancing inflation and growth risks.
- Disinflation: Clearer disinflation and growth moderation observed.
- Payrolls: Critical for the economic outlook.
- ISM Services: Key insights arriving on Monday.
- Fed Speakers: Post-blackout period insights crucial for understanding future moves.
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
So it's been a huge week for Central Banks. Putting the Fed and the US to one side for one moment. How do we expect the events of this week to play out into next?
Neil Staines
Yeah. Great question, Matt. It's been a very busy week. A very volatile week and it's certainly focused the attention of markets. The Bank of Japan, hiked rates to 25 basis points from a range of zero to 0.1. And cut their JGB purchases. The governor Ueda said that it was appropriate to raise rates under the current environment, and that is an environment of more positive consumption, rising wages and rising prices.
And that's led to essentially a narrowing of real rate differentials. And that's been a positive for the Yen and the specific area of volatility that we've seen this week.
The Bank of England, however, cuts rates by 25 basis points to 5% with governor Bailey, alongside Lombardelli, and Breedon joining Dhingra and Ramsden in voting for that 25 basis point cuts. So a narrow margin there, as we pointed out in last week's piece. Five Four the vote on the monetary policy committee. It was however, somewhat hawkish in terms of the narrative around the cuts with services inflation still high and above the levels that the Bank of England would ordinarily be comfortable with.
However, the inflation projections of the forecast horizon are still significantly below target, and that still leads to this continued dovish bias that we see from the Bank of England. We continue to see growth being weaker than the official data suggests, despite the fact that the Bank of England upgraded to their growth forecast for 2024. Last week, we also suggested the possibility that by the end of this year, the Bank may be moving in bigger increments, 50 basis point increments. And that's still not a zero probability.
Markets are pricing another 43 basis points. By the end of this year. And we're still not quite at that level just yet. But as we said, volatility is certainly picking up. Next week we get little data on the UK front, but we do get. Japanese summary of opinions from the most recent meeting. We also get the RBA, which may be interesting, where markets were pricing a small probability of a rate hike until this week's miss to the downside on the inflation prints.
So plenty to look forward to still from Central Banks this week.
Matt Jones
And it's been quite the Q2 earning season so far continuing to dominate global equity markets. What are we looking out for next week?
Neil Staines
Yeah, it certainly has been very interesting earnings have been very important for equity and wider risk sentiment. We're past the halfway mark in reporting season about 60% have reported in the S&P and about the same percentage have beat, which is in line with broad historic beats. There were two main macro factors that dominate in the earning season.
The first and particularly concentrated in the magnificent seven is the concept of AI monetization. There's been a huge investment into the AI themes over recent years. Markets are now a little bit impatient. And in looking for that path or a demonstrable path towards the monetization of that investment spend. And the second point being the, the Q3 guidance or indicative of a slowdown, or something that implies a more recessionary tone to the backdrop. So really centered around consumption and demand and that moderation in Q3, that will be an important focus as we continue through earning season. Next week, we do see consumer names and a more demand driven companies, so that Q3 guidance is going to be very important. At the moment, we're seeing a big trade off between lower yields and duration gains. And the risk appetite. And that will continue to be a key focus for markets next week.
Matt Jones
And what about the Fed and us markets? The Bank of Japan, judge the economy too hot. The Bank of England to cold. What about the Fed? Goldilocks?
Neil Staines
Well, it's a good point. I think far from it, from our perspective, the Fed were very important this week as we point out more in this week's blog. There were minor changes to the statement. But a clear shift in the focus of the Fed in terms of the balance of risks. We have seen clearer disinflation and growth moderation throughout. And that has led the Fed to outline a much clearer balance of risks between inflation and growth and by growth we specifically reference the jobs market and the unemployment rate. That was a fabulous question in the press conference that referred to the fact that if the Fed are required to cut rates before we read the 2% inflation rate should we also be looking to be cutting rates before the unemployment rate gets to an area of discomfort. And so I think that's a very interesting in the broader context, particularly given the fact that the Fed emphasize the balance of these risks. Markets are now actively focused on the path of US growth. Are we headed for something more recessionary or something, which would be more of our preference, of a growth moderation, lower growth rates, but still positive. Payrolls into the close this week, and ISM services on Monday will be key. But also Fed speakers post the blackout period ahead of Wednesday's FOMC and post the important data will be very key for us.
Powell warned that we should look at the data in totality and not on any one print. But it's a CPI and jobs data. They're going to be key to that thesis. There is no doubt that baseline volatility has picked up in markets. And even with a minimal top tier data as the week progresses, it's still going to be a very important week for US assets and for the dollar.
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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