In this episode:
- Global Growth & Trade Outlook
- UK Economic Picture & Policy Implications
- US Inflation, Tariffs, and Fed Policy
Global Growth & Trade Outlook
- Recent data releases from China and Germany highlight weakening global growth momentum, with disappointing retail sales, industrial production, and unemployment figures in China, and weak sentiment and output in Germany.
- Central bank actions this week, including rate cuts from the RBA and Bank of Thailand and a dovish hold from Norges Bank, underscore a softer global economic backdrop.
- Upcoming global flash PMI data and trade figures from the Eurozone and Japan will be key to assessing the impact of newly imposed US tariffs on global activity.
UK Economic Picture & Policy Implications
- Despite stronger-than-expected Q2 GDP growth at +0.3% QoQ, underlying UK weakness is evident, with gains driven by government spending and net trade rather than private consumption or business investment.
- Anticipated fiscal tightening in October is expected to weigh further on consumption and business spending, raising downside risks to growth.
- The Bank of England may need to accelerate rate cuts—potentially by 50bps in November—once fiscal tightening is incorporated into its projections, contrasting with current market pricing.
US Inflation, Tariffs, and Fed Policy
- CPI data showed modest tariff effects and ongoing disinflation, while PPI surprised higher due to retailer/wholesaler margin effects with unclear forward implications.
- The inflation data provides limited clarity on the pass-through impact of tariffs and leaves the Fed’s policy path uncertain.
- Attention turns to next week’s Fed minutes, claims data, home sales, and the Jackson Hole symposium, though no major near-term policy shifts are expected.
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 amid what clearly feels like summer participation, we've had a slightly broader data calendar this week.
So how has this changed our views on the global economy and what are we looking out for next week?
Neil Staines
Yeah, that's a good question, Matthew. We've had plenty of data this week into the close. We had China's data suite which came in very disappointing. Retail sales, industrial production, and unemployment there, all disappointed expectations.
In Germany we also had weak ZEW and that comes after weak industrial production and factory orders last week. This week has also seen a 25 basis point rate cuts from the RBA and the Bank of Thailand and dovish and a dovish hold from the Norges bank who expects to cut further through the remainder of 2025.
Indeed, even the post cut hawkish bias at the RBA came via weak productivity driving labor market tightness. So some underlying weakness there. So it's all a little bit underwhelming from the perspective of the global growth dynamic. And that's something we continue to focus on in the weeks ahead.
Now, next week's data from a global perspective, we see trade data, notably from the Eurozone and Japan. This may be a little early to gauge the impact of the newly imposed tariffs but we also get global flash PMI and that will be very closely watched as a gauge of that trade and economic activity trajectory. We discussed this topic a little further in this week's blog. But as the US tariff impact filters through the supply chain and into demand the global growth impact will be very closely watched next week and beyond.
Matt Jones
A little closer to home, there have been some important data releases in the UK this week, so how have they altered the narrative and what is their next week to, to monitor further?
Neil Staines
Yeah, absolutely indeed. It's been a very interesting week this week for the UK with employment and GDP reports following on from the surprisingly hawkish Bank of England on the seventh. Again, we discuss this further in this week's blog.
But essentially we continue to view the UK as much weaker than the headlines and the data suggest this week's GDP is a strong case in point in that regard at the headline level, Q2 GDP was stronger than expected at plus 0.3%, quarter on quarter. But the strength came from government spending and from net trade, likely front loading ahead of tariffs there.
The weakness came in private consumption and business spending. Now if we fast forward to October when we expect a sharp fiscal tightening from the Chancellor we remove that government support and likely hit consumption and business spending even further via higher taxes and or decreased spending.
Indeed, as we have previously stated when the Bank of England incorporate the likely fiscal tightening into its projections, the downward growth revisions likely from our perspective highlight the need for faster rate cuts. May be even a 50 basis point cut in November.
And at the moment that comes against current pricing of just 15 basis points, cuts for the rest of the year in the UK market curve.
Matt Jones
And finally with the US now, inflation data had kept markets busy this week, and whilst retail sales data is coming later on this afternoon, how has the data impacted our views? And what are we watching for next week?
Neil Staines
Yeah, great question again, Matthew. This week, CPI and PPI, prints were essentially inconclusive in many respects.
CPI showed a modest tariff impact and continued underlying disinflation, one of our core macro views for this year. PPI, however, was a little bit more hawkish with higher than expected core and headline prints. The jump, however, came via a complex channel related to retailer and wholesaler margins, and therefore has less clear forward connotations.
Ultimately, so far, we still have limited new information on the inflation pass through from tariffs and therefore limited new information on the ultimate Fed reaction function. Earlier this week, markets had hoped that's Powell at the all important Jackson Hole Central Banker Symposium next week would pave the way.
For a 50 basis point rate cut after. The uncertainties of the inflation prints this week. That now looks unlikely. Next week we do get Fed Minutes claims, home sales, and of course, that Jackson Hole symposium, nothing is likely to move the needle in the near term. So we're still essentially on wait and see mode until we get a clearer picture on that US growth trajectory.
Until then, Trump and Putin's discussion on Friday evening and the events of Jackson Hole, likely the key drivers for markets and for sentiment.
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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