
In this episode:
- US, UK, and European Data in Focus
- Japan’s Critical Monetary Policy Moment
- China’s Recovery and US Political Shifts
Trade, Tariffs, and China’s Role in the Global Economy
- US Trade Policy in Focus: Trump’s administration is prioritizing negotiation-driven trade deficit corrections, with potential tariff escalation following the April 1st trade deficit review.
- China’s Economic Signals: Upcoming PMI data and holiday activity gauges will reveal insights into China’s domestic demand and its broader impact on global trade.
- Emerging Markets Tied to Trade: Central bank actions across Brazil, Chile and South Africa reflect regional responses to global trade uncertainties and domestic challenges.
Central Bank Decisions Across the Globe
- ECB’s Path Forward: A 25-basis-point rate cut is anticipated, but debates over sub-neutral rates highlight questions about Europe’s growth trajectory.
- Fed’s Inflation Outlook: Core PCE is expected to drop further, adding downside risks to inflation projections and potentially influencing a more dovish Fed policy stance.
- Regional Divergences: From Brazil’s expected rate hikes to Europe’s cautious recovery, central banks are navigating diverse economic pressures.
Macroeconomic Themes Shaping Market Sentiment
- Data-Driven Markets: US GDP, consumer confidence, and inflation data will set the tone for growth and policy expectations.
- Geopolitics Meets Economics: Davos discussions and US political shifts highlight the interplay of policy and global market trends.
- A Week of Market Impact: With major earnings reports, geopolitical shifts, and key economic data, global markets face a pivotal week ahead.
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, this week there's been a massive political focus with the presidential inauguration. We've had a flurry of executive actions, executive orders, and of course the much broadcasted rhetoric of President Trump, but we've also had the World Economic Forum meetings in Davos. So what are we watching for from a global perspective in the next week?
Neil Staines
Yeah, thanks very much, Matt. Great question. It's a huge week for financial markets again. Now, in the last week's in last week's blog, we argued that our general views were not necessarily aligned to consensus expectations for Trump's immediate priorities in terms of the direction and implementation speed of what is essentially the big focus around tariffs. In the confirmation hearing recently, we have also referenced Treasury Secretary Bessent outlined three uses for tariffs. Firstly, the unfair or the treatment of unfair trade practices. Secondly, as a revenue raising tool. And thirdly, as a basis for negotiation, perhaps for more socio political or economic objectives.
Now, markets had largely priced a rapid announcement of China and global tariffs. But so far, the rhetoric has been skewed towards use number three, that negotiation focus. In almost all circumstances, the aim appears to be investment in and purchases of goods from the US, correcting significant trade deficits globally. President Trump has initiated a review of trade deficits with global partners and the result of which is expected on April the 1st hopefully in the afternoon. And possibly the tariff risk increases at that point. In the near term, markets will continue to watch Trump, Bessent, Musk and the rest of the administration very closely and next week will be no different. More globally, next week is also Chinese New Year. I won't try to wish you a happy new year in Chinese, but I do offer that sentiment ahead of which we get the manufacturing and services PMI for January.
This will be an important gauge of any improvement in the domestic demand profile in China. Now, data from the holiday period will also be very keenly watched, as will the real time activity gauges. Elsewhere, we get Australian CPI for December. This will be of keen interest for RBA pricing. February currently has 80 percent priced for the first Australian rate cut there.
And in emerging markets, we get central bank actions in Chile, Colombia, brazil and South Africa. Brazil expected to hike a hundred basis points for the second time consecutively. And we also get the India budget statement on Saturday the 1st. So certainly plenty to look out for. It's going to be a big week for the global economy and a huge week for Trump watchers.
Matt Jones
Thank you, Neil. Now, as I mentioned, while geopolitics in the US political agenda has been a huge focus this week, next week, Focus will swing back to Europe and the ECB. How are we thinking about the ECB at the moment?
Neil Staines
Yeah, good point, Matt. You know, ECB President Lagarde attended a number of panels at the gathering of the global elite in Davos this week.
However, with the Davos schedule falling within the blackout window for the governing council, commentary on monetary policy was left to a minimum. Madame Lagarde's comments were very high level and largely focused on discussions over the European growth model regulation and red tape and even banking union, all outstanding issues for Europe that they really need to deal with at some point soon, particularly given the speed and determination of which President Trump seems to be acting in the US. Now, next week's ECB meeting will likely be relatively straightforward. Markets are almost fully priced for a 25 basis point cut from the Governing Council against a broad narrative that the direction of travel for rates is clear and ultimately that rates are headed towards neutral by summer. Now the big debate or market focus will be around where that neutral level is and whether there is a majority on the ECB that see the need for sub neutral rates to stimulate the economy further in the Eurozone.
Now this morning's PMI data was a welcome relief in that regard, with the composite index in Germany rising above 50 for the first time in a while now next week alongside the ECB, we also get Q4 GDP and January flash data for CPI in Germany, a very interesting week for a European focus.
Matt Jones
An interesting week for Europe, indeed. but with policy meetings and the FOMC next week, it seems that all financial market roads lead to the US at the moment.
Neil Staines
That's absolutely right. Yeah. Another huge week for the US. Independent of anything President Trump may add.
We get PCE for December on Friday of this week. And while that's less interesting as the component parts from the CPI and PPI should give us an almost perfect steer it does shine a light on the US inflation trajectory, a topic which we continue to discuss further in this week's blog.
Now, the base effects step lower. In January core PCE is expected to drop to 2.5 percent from 2.8 percent in December and that is at the same level that the Fed December SEB projections had for the end of the year in 2025. And therefore we continue to see downside risks to those inflation projections.
Outside of anything significantly inflationary from a stimulus or tariff impact as is uniformly expected. But that we see as more balanced from the incoming Trump administration. The inflation path could certainly begin to infer a more dovish US rate path going forward as we see things.
Outside of that, we get US consumer confidence. We'll see whether there's any further Trump effect there in the to the top side. We get Q4 GDP and that'll be important to gauge the evolution of the growth side of the Fed mandate. It's a massive or magnificent week for US earnings, with five of the magnificent seven reporting next week, hugely important for US equity sentiment. And of course, it's the FOMC. Again, little surprise in terms of the decision itself, almost zero priced for the rate move and a pretty uniform expectation of a pause from the Fed after they signaled that at the December meeting with a 25 basis point cut. However, focus will be on the press conference and about the expected impact on growth and inflation from Trump policy trajectories.
Now, not to mention. The inevitable questions on Fed independence, given comments this week, suggesting presidential pressure to lower rates on the Fed, all in all, another huge week for the US and a huge week for financial markets.
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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