In this episode:
- Global Macro Outlook: A Focus Beyond the U.S.
- U.S. Tariffs and Geopolitical Risks
- U.K. Macro Data and Bank of England Expectations
Global Macro Outlook: A Focus Beyond the U.S.
- Global Data Focus: A relatively quiet week for the U.S. provides an opportunity to monitor global events, with key data releases from Japan, Australia, and New Zealand.
- Japan in Focus: Q4 GDP and CPI data could offer clues on future Bank of Japan policy adjustments.
- Europe's Political Landscape: The German election outcome may influence fiscal policy, with potential implications for markets.
U.S. Tariffs and Geopolitical Risks
- Negotiated Reciprocity: A shift toward negotiated tariffs may reduce global risk premiums and positively impact equity and bond markets.
- Russia-Ukraine Dynamics: Easing geopolitical tensions could further reduce global inflation risk premiums and influence market behavior.
- Monetary Policy Implications: A focus on fiscal consolidation in the U.S. might lead to significant changes in monetary policy expectations.
U.K. Macro Data and Bank of England Expectations
- Key Data Releases: Employment, CPI, and retail sales data for January will be closely monitored for signs of economic direction.
- Growth Concerns: Despite a positive December GDP figure, underlying risks to growth remain elevated due to fiscal pressures and private sector recession concerns.
- Monetary Policy Outlook: We expect the Bank of England to cut rates more significantly than currently priced, driven by deteriorating economic conditions.
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, for a change, and as far as macro data is concerned next week seems a little quieter from a US perspective. Perhaps that gives us a chance to focus on the rest of the world. What are the key focus points for next week?
Neil Staines
Yeah, absolutely. Thanks very much, Matt. It's a quiet week next week for the US as you say, and it starts off very quiet indeed with the US president's Day holiday on Monday. It's even quiet from an earnings perspective as the season comes to a close.
We're now really waiting for NVIDIA on the 26th. Now Whilst it's a quiet week for the US, it's slightly more busy for the rest of the world. On Monday, we get Japanese Q4 GDP. That's going to be very closely watched, particularly in terms of the deflator and household consumption in regards to the potential for the next updated rate hike from the Bank of Japan.
We're expecting that sometime around the middle of the year. On Tuesday we get the RBA and they're roundly expected to begin their rate cutting cycle with a 25 basis point cut after Australia has seen inflation broadly at target, although core rates still slightly higher at 3.2%, but on working their way down in the right trajectory and the growth backdrop there beginning to slow marginally. On Wednesday we get the RBNZ. Now they're expected to cut 50 basis points with inflation again at target but growth slowing a little more sharply. And then on Friday, we get Japanese CPI again, another focus for the Bank of Japan and perhaps more importantly, the global flash PMIs.
Global Flash PMIs on Friday then giving us an important update as to the relative trajectory of the global economy and an important focal point for markets there. Also at the back end of next week into the weekend we get the German election and that's going to be a big focus of markets. The focus is going to be on the share and thus the influence of the AFD.
The size of the CDU CSU win and that's certainly something that's clearly expected and the likely shape of the coalition that comes with that the implications or inference for a potential change in the debt break going forward, some much needed fiscal across Germany and of course, any signs of an economic plan in the face of Trump tariff and trade negotiations that are ongoing and a big focal point for markets at the moment.
So a big week for the global economy. And that's more broadly across Europe and Asia next week.
Matt Jones
Thank you, Neil. Now, despite the lack of US data, I suspect the US will continue to be front and center for financial markets next week. So how are we thinking about the current tariff and dominant geopolitical themes at the moment?
Neil Staines
Yeah, good point, Matt. Markets will continue to focus on the evolution of US policy and rhetoric on tariffs and on the Russia Ukraine situation.
And we expand upon this a little bit more in this week's blog, but essentially we see these as the two dominant factors for the global macro at the moment. Now, firstly, on tariffs, we have a more sanguine view and we have held that view for some time. Markets are beginning to converge to this view of a more negotiated path of tariffs and a less confrontational escalating path there.
The important term that seems to have evolved this week is that of negotiated reciprocity. Now, reciprocal tariffs have two meanings perhaps in our minds. They likely limit The magnitude of the tariffs they may also make counterparties reconsider the level of their tariffs on the US, ultimately leading to lower global tariffs, which could ultimately be a side effect of this negotiation.
The negotiated part, I think, is very important, particularly in relation to the risk premium surrounding the prospect of escalation, i. e. with companies responding with like for like tariff escalation. The risk premium there should have reduced significantly. So I think overall the notion from this topic of negotiated reciprocity should be one that reduced tariff growth and inflation risk premium.
And that should be positive for global equities and also positive for the long end of the bond market. It's the second point on Russia, Ukraine likely has a similar vector from the perspective of global risk. The market debate centers on factors such as the reopening of Russian oil and its impact on the global energy supply chain and rebuilding contracts among other things which again points to a continued removal of risk premium in broader markets. In this regard, the FOMC minutes on Wednesday may be a little backward looking. The inflation risk premium reduction and long end of the rate curve move as Powell referenced in this week's testimony to the House Banking Committee is very significant and particularly when if things evolve as we expect , that market start to focus on the prospect of material fiscal consolidation from the impact of the Department of Government efficiency again a another factor which we think have significant implications for monetary policy for duration in the US and something that we think that the market is still not pricing correctly in terms of acceptance of what can be achieved under reduction of fiscal in the US.
Matt Jones
Thank you, Neil. So this week we had some mixed growth data in the UK and it's going to be another big week for UK data. What are we looking for and how does this translate into the Bank of England thinking?
Neil Staines
Yeah, thanks, Matt. That's a great question, and it is indeed a huge week for the UK. On Tuesday, we get the employment report update, on Wednesday, the CPI print for January, and on Friday, it's retail sales, also for January.
Now, this week, we had the December monthly GDP print that was greater or bigger than expected. However, we see this as a positive blip on an otherwise negative trajectory. We are seeing private sector in recession at the moment. Risks to public spending continue. And that is only going to be increased by the downward revisions to the OBR forecasts that we saw also this week, which suggests no fiscal headroom left. Now for a couple of months, we have argued that the fiscal expansion in the autumn budget would feel like a fiscal tightening at least at the consumer level on the OBR downgrades to growth from this week likely mean that March's fiscal event will be an actual or further tightening spending cuts or tax increases likely there. Now in the near term, this is likely to make the growth backdrop even worse. So the employment, CPI and retail sales this week will give an important update.
And in particular, with the help of the removal of the US and, albeit by default, global inflation risk premium, we continue to expect the Bank of England to cut by more than is currently priced in, perhaps significantly more.
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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