
In this episode:
- UK Growth, China Stimulus, and ECB Expectations
- ECB and Global Flash PMI
- The US and Broader Global Economy
UK Growth, China Stimulus, and ECB Expectations
- UK data shows strength but doubts over sustainability, potentially leading to a more dovish Bank of England.
- China’s stimulus could boost European manufacturing, offering hope for growth.
- The ECB balances concerns over inflation with signals of a gradual recovery in household spending
ECB and Global Flash PMI
- The ECB’s rate cut raises speculation about further reductions, though caution prevails.
- Global flash PMI data will be pivotal in assessing the trajectory of economic recovery.
- Europe’s labor markets remain resilient, supporting consumer spending despite broader economic concerns.
The US and Broader Global Economy
- Global markets remain volatile due to geopolitical risks and mixed macro signals.
- The IMF spring meetings will be a key forum for central banks to discuss inflation, growth, and trade.
- Corporate earnings, especially from tech giants, will significantly impact market sentiment.
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 an interesting week for the UK with some better data on all fronts. How are we looking at next week? And the run into both the UK budget and the November bank of England meeting.
Neil Staines
Yeah, thanks very much, Matt.
Great question. The data indeed has been pretty strong this week. Although there are some doubts around the sustainability of that data. Friday we saw retail sales data, which is much stronger than expected. However, the non-food component of that was stronger. So there may be an element of people. Purchasing suitable clothing for the turn in the weather. On the CPI front on Wednesday, we saw much better data, but the headline dropping to just 1.7. Percent on a year on year basis. And that certainly should put the bank of England reaction function under pressure.
And as far back as Monday we saw improved employment data. However, there is potentially some uncertainty around that data with the seasonal adjustments in the response rates to that data, all suggesting some caution. We continue to see a weaker underlying growth dynamic than the market data suggests.
And I think that's very important for the bank of England reaction function going forward. Alongside that we have the imminent budget, as you say, Matthew. Interestingly, a recent survey of concerns highlighted the cost of living as the number one issue, even with inflation at the current level of 1.7%. Ultimately for us, that suggests that there's a concern over the absolute level of prices, and for us, that means that there are question marks over the absolute tightness of the UK economy, relative to the path of interest rates, given the level of prices. So that I think is something that leads itself or lends itself to a more dovish reaction function from the bank of England going forward.
On top of that, we have the budget itself. And potential additional tightening there as the government strives to balance the finances along with its committed and desired spending goals. Ultimately from our perspective, this points to the need for further monetary support to offset both the increased prospects of faltering consumption from the UK as a function of high prices. And tighter fiscal conditions against that. Markets see almost no chance of a 50 basis point cut in November. But this is the bank of England and this is a monetary policy report month. But either way we do anticipate a more activist bank of England going forward.
Matt Jones
It's also been a big week for Europe with a 25 basis point cut from the ECB. How are we thinking about the impact on market focus for next week?
Neil Staines
Yeah, very important, Matt. The ECB cut the deposit rate by 25 basis points to three and a quarter percent as expected this week. The statement and the press conference, highlighted risks to growth and thus inflation are continuing to the downside. And that monetary policy is working in, essentially that it's that higher rates are bringing down inflation.
However, while markets have been very quick to price, an increased probability of a 50 basis point cut in December, President Lagarde pointed to a gradual recovery in household spending. Indeed, this week's bank lending, survey, and credit impulse also point to a growth recovery in Europe. Labor markets softening still remain resilient in the Eurozone. And the unemployment rate is at historic lows, which should be supportive for the consumer in general.
China stimulus is also potentially a significant boon for beleaguered European manufacturing sectors. And Lagarde stated that we certainly do not see a recession. Therefore, from our perspective, it's much more balanced than the market's approach in pricing in a sharper pace of rate cuts when the ECB and going forward, likely a more positive. Next week states a calendar is quite light. Except for the global flash PMI data for October, the trajectory of which is going to be very important for the gauging of the market view on economic sentiment and there are a host of ECB speakers next week ahead of the IMF spring meetings in Washington that will be very closely watched.
Matt Jones
And finally. And certainly by no means least. What about the US and the broader global economy? How are we thinking about the global macro backdrop and the dominant market themes at the moment?
Neil Staines
Yeah, thanks, Matt. That's a very important question. As we mentioned, it's the IMF spring meetings next week. So central bankers and economic participants from around the world. We'll gather to discuss inflation growth, geopolitics domestic politics and global trade among other things.
Markets will be very closely watching, therefore, a multitude of global central bank speakers. If indeed that is the correct collective noun for central bankers. There'll be closely watched for inference on policy and the balance of risks going forward. In the US it's a quiet week for data, the beige book on Wednesday it's likely the pick of the bunch to focus at the state level on economic evolution, but more broadly, the current macro backdrop continues to be one of uncertainty and volatility.
We touched on this in last week's blog and podcast, but ultimately that is a function or a factor that is dominating market sentiment at the moment. It's a big week for corporate earnings next week with GM, iBM, Tesla, Microsoft, Google, Amazon, and Intel, all reporting. And there'll be a significant market focus, particularly with S&P currently trading a record highs. Geopolitics and the fast approaching US election likely keep that baseline volatility for global markets, highly elevated and market attention significantly focused on markets next week.
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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