of the week ahead

Market overview

The global markets saw a volatile end to the previous week, hinting at sustained volatility in the week ahead. Neil Staines highlights the critical juncture the markets are facing, especially concerning policy rates and global macroeconomics. From the robust performance of India to signs of momentum in the UK, Japan, and Australia, the global economic landscape is under scrutiny. Keep an eye on key data releases, such as Germany's retail sales and China's PMI data, to gauge the pulse of the global economy.

US market focus

The spotlight shifts to the U.S., after the, much debated, recent GDP data. With a keen eye on jobs data, including ADP, JOLTS, and Non-Farm Payroll numbers, the market anticipates insights into the growth and inflation trade-off. The evolving equilibrium growth rates and the breakeven jobs rate add layers of complexity to the market narrative.

Monetary policy and FOMC expectations

Amidst this economic backdrop, the Federal Open Market Committee (FOMC) meeting takes center stage. The Fed's stance on unchanged rates with a close eye on growth and inflation projections sets the tone for market sentiment. We expect a nuanced approach from Powell in the press conference, an emphasis on data dependence and the need for further confidence before rate cuts. Watch out for potential updates on balance sheet runoff and Powell's delicate navigation of U.S. monetary policy complexities.


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 after a relatively volatile close to this week, next week looks set to maintain, if not accelerate, that baseline market volatility. So, what are we focused on from a market perspective?

Neil Staines

Yeah, thanks very much, Matt.

You're right markets have certainly been a lot more attentive, you might even say nervous, towards the backdrop to the global macro economy. What is essentially a critical juncture, from our perspective, for markets and for policy rates. Now last week we had the global PMI data where India clearly continued their outperformance, UK, Japan and Australia showed signs of continuing momentum; and even the Eurozone showed some further resilience in bouncing from the lows. Indeed, the German data is a likely consistent with a bottoming out in the German economy, and that has significant connotations, more broadly for our global outlook. Germany has retail sales on Monday, so that will be a significant focus in continuing that momentum. And if we put that into the context of the importance of Europe and China in terms of the global economic growth picture and their recovery being significant to that, we also focus on Tuesday on the China PMI data, that's for April.

In Japan, we get to focus on retail sales, industrial production, and an unemployment rate after what has been a considerable focus on Japanese policy, with the burst higher and Dollar/Yen following the unchanged rates from the Bank of Japan that we saw at the end of this week.

In Norway rates are likely to remain unchanged, but there's going to be policy pressure given the fact that the CPI print has moved down significantly over recent months, and the February GDP data missed sharply to the downside. So risks of a more dovish outlook from the Norges Bank there. And Swiss inflation will also be a big focus after coming down sharply over the recent months. Now we're expecting the inflation print around 1.1 significantly below the Swiss National Bank's targets, and we have a 70% probability of a rate cut or second rate cut from the Swiss National Bank priced in June.
So a big week for the broader global markets, and something will be focused intently on.

Matt Jones

I suspect, however, the spotlight will remain on the U.S. especially after the GDP data sparked quite a debate. What are we looking out for in the USD to this week?

Neil Staines

Yeah, you're right, Matt. Again. The a significant macro debate this week. Around the GDP data has left a huge focus on the U S and in that respect. The data for next week is going to be very important.

After last week's PMI data showed significant weakness in the U.S., especially relative to the brighter spots in the global economy, we will be significantly focused on the ISM this week, which we see as a much more reliable indicator of manufacturing and services activity. So manufacturing data on Wednesday and services data from the ISM on Friday will be a key focus. However, whilst the key debate likely for the markets, and the Fed, is going to be around these inflation and growth trade-off, and that comes very sharply in the form of jobs data next week. ADP and JOLTS on Wednesday, and the all-important Non-Farm Payroll data on Friday. Now, the market is expecting or looking for around a 250,000 job growth, that's relative to 303,000 last week and still relatively elevated, an unemployment rate of around 3.8% broadly unchanged from last month and a 4% average hourly earnings print, which is continuing the decline back down towards what is deemed to be the level consistent with inflation at target around 3.5%. Now, as we've mentioned in the blogs over recent weeks, it's important to put these data into context, certainly given the fact that the Fed and markets have recently upgraded their expectations for the equilibrium growth rates, given improvements in productivity and in supply side, particularly around the labor market. So that applies not just to the GDP figure that we've had now, but also to the breakeven jobs rate, the level at which employment rate is not inflationary.

I think that has a huge impact on our interpretation of the data where we can get higher prints and still leave room for policy easing in the U.S. I think that's an important narrative for the market at the moment. That's not to forget, of course, that there is also another topic that we've discussed in the blogs of late, and that is that the inherent seasonality that we see throughout Q1 may no longer be there when we get the April jobs data at the back end of this week. So certainly a very interesting focus for markets and for policymakers alike.

Matt Jones

How does this tie in with the monetary policy response and what do you expect from the FOMC?

Neil Staines

Good question, Matt. The FOMC next week we'll be very keenly watched. The Fed are in an increasingly tricky position. We expect unchanged rates. Although markets will be acutely attentive to changes in the statement's wording, particularly around growth, inflation and the likely activism of the Fed and the balance of risks around those growth and inflation projections. It's all really though about the press conference. We expect Powell to emphasize the progress that has been made to date on inflation. To play down the significance of recent volatility and inflation prints, and to emphasize data dependence whilst stressing the need for further confidence before the Fed can actively cuts rates.

There were no new projections next week, which is likely helpful for the Powell narrative in terms of waiting to see further upcoming data. There is a slight helpful distraction perhaps in terms of the announcement that we expect on QT, slowing the pace of current balance sheet runoff. Powell will likely have to utilize all his skills as a lawyer to choose very careful wording at what is a very complex juncture for U.S. monetary policy. And we discussed these issues further in this week's blog, but it's likely to be a very interesting week for policy for rates 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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