Monday Espresso Podcast - 4th April 2022

[00:00:00] Sheldon MacDonald: It is the 4th of April today, already last week saw the end of the first quarter of 2022. Let's start off on a negative note. In that last week, we saw the inversion of the US yield curve, so this is the two year yield rising higher than the 10 year yield. Now that's important because previously in markets, historically, it's been a precursor to a recession.

[00:00:23] Sheldon MacDonald: I think though, maybe not such bad news this time round, because actually the US economy is pretty strong and perhaps insulated from some of the worst inflationary effects of the, the conflict in Europe. But also, we've got the labour market is pretty strong, unemployment and wage growth numbers. We've got good stimulus coming through there, so perhaps not as weak as expected.

[00:00:45] Sheldon MacDonald: Nathan, some colour that you can provide on that front.

[00:00:47] Nathan Sweeney: Yeah, actually, if we look at the US stock market, it's been rebounding quite well since March, so if we look at the numbers for the month of March, the S&P is up over 5%, so some strong numbers there.

[00:00:59] Nathan Sweeney: If we look at unemployment, so unemployment is obviously a good gauge of what's happening in the economy and the unemployment level continues to fall.

[00:01:08] Nathan Sweeney: So we have unemployment in the US now at 3.6%, so that means lots of people working, lots of people spending money, which is always good for the economy. The other point there is that we know that wage inflation is picking up, so wages are increasing.

[00:01:23] Nathan Sweeney: That's also good for people who are working because they have more money to spend, but importantly, the labour force participation rate, so it's the number of people working in the economy that's increasing too, so these higher wages are encouraging people to come back to work and on top of that, last week, we saw some stimulus figures coming out in the US, so Joe Biden, president of the US, he's committed to spending $5.8 trillion, so it's a new budget plan, and that money is going to be focused on military support for Russia and Ukraine and then also to help the American public deal with the consequences of the higher cost of living, so there's lots of positives there.

[00:02:02] Sheldon MacDonald: Let's turn to the UK now, the news last week was that we saw the Q4 GDP figure, revised upwards, quite a high revision. It was revised up from 1% increase in the quarter to 1.3%, and that took the whole year growth rate to 7.4%.

[00:02:18] Sheldon MacDonald: That's pretty strong, clearly though, we're expecting a much lower figure this year, given the effects of lingering COVID, of inflation and of the conflict. Even closer to the conflict as you get closer, the effects certainly ramp up. European inflation last week, hit seven and a half percent, now that's an all time high underlying that figure, though, if you look at the figure ex-energy, if you take out the oil price, then inflation is running at 3.4%.

[00:02:44] Sheldon MacDonald: So perhaps a little bit more manageable, but clearly showing the impact of the energy price. Also, if you look at some alternative data that tracks people's habits and movements and so on. So far, the higher price is not yet really impacting people's habits, so perhaps some sign of positivity there. Now thinking about that oil price, we did see the old price come down last week.

[00:03:06] Nathan Sweeney: Yes, we actually saw a dramatic fall in the oil price last week, so if we look at US crude, it actually fell below the $100 a barrel mark, so that was roughly a decline of about 13% for the week, so what's driving this fall in the oil price. Basically, the US has come out and said that they're looking to release oil from their strategic reserves.

[00:03:27] Nathan Sweeney: So they said they were looking to release 180 million barrels of oil from their strategic reserves over the next six months.

[00:03:35] Sheldon MacDonald: So to put that into context for us, what do, what does that equate to in terms of actual usage?

[00:03:40] Nathan Sweeney: Yeah, so if we look at the usage of oil a day, it's about 97 million barrels of oil a day. So this would equate to about 2% of that overall volume, so it'll definitely have an impact.

[00:03:53] Sheldon MacDonald: Let's turn to another area that was positive last week and that was China.

[00:03:56] Nathan Sweeney: Yeah, so we had some good news out of China, so recently it has been a lot of concern about Chinese companies which are listed in the US and the concern has been around audit data.

[00:04:07] Nathan Sweeney: So the US is saying to these Chinese companies, we want to see audit data for these companies. The Chinese government was saying, we're reluctant to provide that data and there's been a bit of a log jam and the U S was actually going to delist these companies, if that information wasn't provided. The Chinese companies have now come out and said that they're happy to share that information.

[00:04:26] Nathan Sweeney: So it looks like these companies won't be delisted and what you saw was a sharp move in Chinese stocks on Friday, and some of these companies were up quite strongly on the day and Chinese stocks posted a return of 4% for the week in sterling terms.

[00:04:41] Sheldon MacDonald: And sticking with positive news, we always like to throw something in on ESG.

[00:04:45] Sheldon MacDonald: You've got some news on what's happening in the aviation world.

[00:04:49] Nathan Sweeney: Yeah, so we saw that British Airways announced that they were looking to deliver sustainable aviation fuel or safe, so essentially this is creating aviation fuel from waste product, think chip pan oil, so this would mean not using carbon heavy inputs to power those planes.

[00:05:08] Nathan Sweeney: So this is definitely a positive move forward, and it will be really good for the industry as it can help to reduce emissions and that industry has a bad name in terms of being a carbon emitter, so definitely a positive step forward for the airline industry

[00:05:23] Sheldon MacDonald: and perhaps positive on the inflation front as well.

[00:05:27] Sheldon MacDonald: Thank you very much. We hope to speak to you again next week.