Monday Espresso Podcast - 5th June 2023

[00:00:00] Sheldon MacDonald: It's the 5th of June today, we had a pretty strong undertone to equity markets last week, a lot of that, especially in the US where we finally saw agreement and ratification of the debt ceiling deal.

[00:00:12] Sheldon MacDonald: It's called very grandly, the Fiscal Responsibility Act, this suspends the debt limit until 2025 and it will cap some discretionary spending in the next couple of years, but this really isn't expected to have very much impact on the growth outlook.

[00:00:28] Sheldon MacDonald: So that removal of uncertainty that had been hanging over us for a good couple of weeks now, we've been speaking about it in this podcast for a little while, that really helped the market, as I said a positive undertone.

[00:00:39] Nathan Sweeney: Yeah. Just a quick recap for those who might not know. So the debt limit is basically like the credit limit for the US government and in their constitution they have to raise that every so often if they get close to it.

[00:00:55] Nathan Sweeney: So what you've seen is they've agreed to raise it, and that provides a bit of certainty for markets and as a result, we've seen some strong markets over the last couple of weeks.
[00:01:04] Sheldon MacDonald: Now, in the previous couple of weeks, the leadership we've been seeing has been from the growth stocks, but this week that broadened out, didn't it?

[00:01:11] Nathan Sweeney: Yeah, so there's a couple of things to pick up on that.

[00:01:14] Nathan Sweeney: So firstly, we had unemployment data out on Friday, and if we look at the unemployment data, it looked good because there's lots of jobs still being created but if you delve into the numbers, you can see that actually the unemployment rate rose, so more people out of work, so it's gone from 3.4% to 3.7%, and that's obviously bad news but it's good news for the Fed and it's good news for inflation.

[00:01:42] Nathan Sweeney: So what do I mean by that? It's good news for inflation because if less people are working, less people are spending, and therefore that brings down inflation and if you look at wage inflation, which measures the pace of wages going up, that also came down.

[00:01:56] Nathan Sweeney: So that's evidence that inflation is likely to fall, and it also means that the Fed can stop raising interest rates.

[00:02:02] Nathan Sweeney: So what you really saw happen on Friday last week when this data came out, it wasn't the tech stocks that rallied the most, it was the rest of the market because if interest rates come down, it means that all of these other companies can increase their profits cuz they'll have lower costs or lower financing costs from lower interest rates.

[00:02:22] Sheldon MacDonald: So positive undertone there as you say, for the broader market, we're also seeing some other indications that things are perhaps normalising. The VIX index often called the fear gauge, I guess, measures the cost of ensuring yourself against adverse outcomes.

[00:02:37] Sheldon MacDonald: That's at pretty low levels indicating, you know, normal conditions expected ahead, and also credit spreads in the bond market, also certainly not indicating anything untoward at the moment. So as we say, a relatively strong undertone.

[00:02:53] Sheldon MacDonald: We did also see inflation figures out of Europe last week also lower than expected, so inflation continues to come down pretty strongly. On the other hand, we have seen oil production cuts announced over the weekend, especially by Saudi Arabia.

[00:03:10] Sheldon MacDonald: Now they're saying they need the oil price to be at a target level of around $80. We're currently at $70. An increase in oil price obviously has an upward impact on inflation. So there is still the risk that inflation may linger for a little while yet and a lot of the commentators, the strategists out there, have been cutting their probabilities that they ascribe to the chance of rate cuts later in the year.

[00:03:38] Sheldon MacDonald: In the meantime though, in the weeks ahead, obviously this will continue to be the, the main focus of debate and attention, is this will they, won't they cutting of interest rates. We perhaps will get some indication of that just in the next couple of weeks. We do have another round of central bank meetings.

[00:03:54] Sheldon MacDonald: Turning our attention a bit broader to international markets. Japan is an area that has seen a couple of column inches recently, some commentators speaking about that. It really is a market that is starting to demand some attention. We've got 50% of stocks there trading below book value. So certainly some inherent value opportunities there.

[00:04:15] Sheldon MacDonald: There's a potential for a domestic demand recovery, which could spur things, and also corporate governance from the companies themselves. Companies being better managed, providing better governance may unlock some of that inherent value. Now we have our asset allocation meeting tomorrow, and certainly something that we're going to be looking at.

[00:04:36] Sheldon MacDonald: Other than that, what else have we got for the week ahead, Nathan?

[00:04:39] Nathan Sweeney: Yeah, so for this week a bit of a focus in the UK will be on house prices. So we've got the Halifax House Price Index. We've also got a measure which will gauge what's happening in the service sector. A bit further afield, in Europe, we've got economic growth, so has the European economy been growing or contracting?

[00:04:57] Nathan Sweeney: The expectations there is that it'll be flat for the quarter, and then we've got inflation data coming out of China and Brazil. So plenty of data for the market this week.

[00:05:06] Sheldon MacDonald: As always, lots to keep us interested and we look forward to speaking to you again next week.