Monday Espresso Podcast 5th September 2022

[00:00:00] Sheldon MacDonald: It is the 5th of September. A difficult week for markets last week, we saw bonds struggling and the news last week, also that bonds hit bear market territory for the first time ever really.

[00:00:11] We had the Bloomberg global aggregate index falling by more than 20%, which is the threshold for a bear market.

[00:00:17] Equity markets also struggling last week and really markets reacting to the tough talk by central banks that we heard the previous week, particularly in the Jackson Hole symposium of central bankers and really markets translating that, interpreting those comments as expectations of higher interest rates to come.

[00:00:36] Now, bringing that into focus, we saw European inflation hitting 9.1% last week.

[00:00:42] Unemployment at new lows in Europe, so that's keeping the pressure on inflation and markets really expecting a 75 basis points rate hike from the European Central Bank this week.

[00:00:54] Now one of the big drivers of that inflation in Europe is the energy price, the energy price had fallen from previous weeks.

[00:01:01] It had come down about 30% of its peak, but that price is expected to rise again on the news that Russia will keep indefinitely closed the Nordstream One pipeline that brings energy to Western Europe.

[00:01:14] Also on the inflation front, we've seen in China, fresh lockdowns in several of the industrial areas, and so that will also keep pressure on inflation.

[00:01:22] Some better news that out of the US Nathan?

[00:01:25] Nathan Sweeney: So it's definitely not all doom and gloom. If we'd look at the US last week, we did have inflation data coming out, so we had the core PCE inflation data.

[00:01:35] This is one of the measures that the Fed focuses on, and we actually saw the first monthly decline in that figure since pre-pandemic, so there's definitely good news there.

[00:01:45] On the other front, we actually saw that petrol prices have continued to fall throughout August, and they're about 13% lower, so again, that will feed through, into lower inflation.

[00:01:56] But for me, the most interesting piece of news on the week was the fact that we didn't see any wage inflation in the jobs report, because ultimately the Fed has been focused on inflation and ensuring that we don't get wage inflation.

[00:02:12] So this is quite a good number coming out last week, this was as a result of the labor force participation rate increasing, so more people coming into the labor force.

[00:02:22] So people coming back into the workforce, getting jobs after the summer months, so we saw 786,000 people returning to the workforce, which caused the unemployment rate to tick up.

[00:02:35] But it's actually a positive because it means that more people willing to work, so employers don't have to pay up to attract workers.

[00:02:44] Sheldon MacDonald: In the meantime though, pretty much around the world we're all tackling a cost of living crisis.

[00:02:49] Germany last week, unveiled a 65 billion Euro package to try and support hard hit consumers.

[00:02:55] Here, closer to home we'll have to wait probably another week to hear what the new Prime Minister will do for us.

[00:03:01] We've got Raj on the line today, Raj is our UK specialist. Raj, what are we expecting?

[00:03:05] Raj Manon: By the time you hear this, we will likely already know who the next prime minister is.

[00:03:10] Liz truss is the clear front runner and if she does win, she will have some huge issues to deal with straight away.

[00:03:18] The cost of living crisis is continuing to worsen. Inflation is at double digits and growth is slowing and that slowing can be seen across various parts of the economy, but particularly in manufacturing and industrial sectors.

[00:03:35] Of the two candidates, Sunak has a more cautious approach, focusing on bringing down inflation and tackling longer term issues, whereas Truss will attempt to boost growth by announcing tax cuts and significant new expenditure.

[00:03:52] These more stimulative policies are viewed as adding to the UK's inflation problem.

[00:03:59] As mentioned, Truss is expected to win and for markets, we have already seen some movement in Guilts and in Sterling. The 10 year Guilt yield is this morning approaching 3% and Sterling is trading below £1.15 versus the dollar and a little over £1.15 versus the Euro.

[00:04:22] If Liz Truss does win as expected, we will likely see Guilts and Sterling under further pressure, although we may have already seen most of that move.

[00:04:33] Looking ahead, Truss has promised to make an announcement within a week to help on the cost of living front.

[00:04:40] Sheldon MacDonald: So a fascinating week ahead of us, really, as we find out what happens on the political front and then what that will mean for us as consumers and also as investors.

[00:04:49] As Raj mentioned, Sterling weakness is actually a positive for UK investors.

[00:04:53] To the extent that there are any offshore holdings in the portfolios, translated back at a weaker Sterling level that gives you higher returns.

[00:05:01] And it's also a positive for the large swathe of UK PLC, that earns its revenues offshore, so an economic positive, even though it makes holidays and imports much more expensive.

[00:05:14] But as I say, a fascinating week, and we'll speak to you again next week.