Monday Espresso Podcast - 6th February 2023

[00:00:00] Sheldon MacDonald: It's the 6th of February today. The strong start of the year continues with another strong week in equity markets last week. Bond markets marking time, but the equity markets running ahead led by the US.

[00:00:12] Nathan Sweeney: Yeah, so we gave some really good returns last week in markets FTSE was up 1.76 and the S&P was up 1.64%.

[00:00:19] Nathan Sweeney: But the standout was actually the NASDAQ. As we all know, the NASDAQ is the tech-heavy index in the US and we're seeing some good returns there, particularly on a year-to-date basis. So the NASDAQ is up 15% year to date. So that's a big move and if we actually peer inside of that, there's a number of companies who've seen some stellar moves year to date.

[00:00:42] Nathan Sweeney: Some quick examples would be meta or Facebook. Year to date, that stock is up a whopping 55%, Tesla up 54%, Nvidia up 44%, Amazon is up 23%, Apple, close to 19% and Google up 18%. So it just really goes to show that we've seen some really quick moves in the tech space year to date, following some disastrous moves down in tech last year.

[00:01:10] Sheldon MacDonald: And of course last week things also bolstered by earnings coming out. Earnings, though not coming out as strong as expected, although at least they are higher than expected, but not by as much as we normally see. Now the interesting point though is that while revenues are up around about 5% on average, so far we have seen earnings start to decline a little.

[00:01:33] Sheldon MacDonald: So when revenues are up and earnings aren't, that means margin pressures are starting to build. Companies are absorbing costs, not able to pass them on. And so that begs the question, what will companies do to remove those costs and the obvious thing is layoffs. Now, clearly we've seen some fairly high profile layoffs in the last couple of weeks and months, but yet the earnings report last week was pretty strong.

[00:01:58] Nathan Sweeney: Yeah, and this is the really interesting piece because I think it's separating the signal from the noise. So the noise is the fact that we're seeing all of these layoffs, but actually when you look at the signal or the market data, it's telling you something different. So what do I mean by that? So if we look at unemployment data in the US, we had figures coming out on Friday and unemployment actually fell, not rose.

[00:02:21] Nathan Sweeney: So it fell from 3.5% down to 3.4%. And you know, this is moving against all of those layoffs we've seen in the tech space. But as I've mentioned before, tech only accounts for 2% of employment in the US and there's lots of other sectors hiring. So this is quite good news and the really interesting point about all this is that we aren't seeing wage inflation.

[00:02:45] Nathan Sweeney: So wages are actually coming down. The reason behind that is because people are coming back into the workforce.

[00:02:52] Sheldon MacDonald: Sorry, just to clarify, wages not coming down, just going up by less than before. So wage disinflation is starting the jobs number last week, really, as we mentioned, giving people a bit of a surprise.

[00:03:05] Sheldon MacDonald: Over 500,000 jobs added in the month in the US, leading to that unemployment figure, which is a 54 year low, the US isn't alone, many other developed market economies at pretty close to record low unemployment, and that's leading to people thinking, you know what a long and protracted recession is unlikely in this sort of situation.

[00:03:27] Sheldon MacDonald: Now, of course, given what's happened with the unemployment figure, the US Fed, the US Central Bank has said that the unemployment figures that the tight labour market is something that they are really focused on, so it means that previous expectations that maybe the Fed could stop their interest rate hiking program sooner, those are kind of out the window, and so the next hike at the next meeting is still now expected to be an additional 25 basis points.

[00:03:56] Sheldon MacDonald: Of course, last week we saw the Fed meeting and delivering the as expected 25 basis point hike and we also had the UK and the EU Central banks delivering the expected 50 basis point hikes. We did speak last week about the Chinese PMI that was released last week, we just said that it might be the first indicator about how the economy is doing post the relaxation of covid rules.

[00:04:21] Sheldon MacDonald: Now that PMI figure, the manufacturing PMI came out higher than expected at 50.1. It's only just above the 50 level, which indicates above 50.,You're expanding below 50, you're contracting. But importantly, the services PMI, that was up at 54, up from 41 the previous month. So really strong bounce.

[00:04:42] Sheldon MacDonald: We've had the IMF come out with their forecast pushing up their forecast for Chinese growth to 5.2% from a previous 4.4%.

[00:04:52] Sheldon MacDonald: And the Chinese economy only having grown 3% in 2022, the lowest in decades. So that rebound, that pent-up demand is really pushing the economy, the Chinese New Year spending at least spending over the Chinese New Year, that was a full 30% on the previous year. So really strong pent-up demand, remember here the strength of the pent-up demand in in Western economies.

[00:05:15] Sheldon MacDonald: Well, China's effectively been in lockdown for about three years, so a big potential push from that side. Of course, infection spikes are possible, which might hamper supply chain side, but in the meantime, the supply chain issues are easing. Enough on that though, a quick look at the week ahead, Nathan.

[00:05:36] Sheldon MacDonald: What's coming up this week.

[00:05:37] Nathan Sweeney: Okay, so the big question for the UK is, are we headed to a recession? We've got GDP figures for Q4, so we'll get some idea as to what that looks like. We've got company earnings this week, so we've got another raft of companies coming out with their earnings will give us a clear picture of what's happening in the economy.

[00:05:53] Nathan Sweeney: Companies like Walt Disney, PepsiCo, Philip Morris, CVC Health, Uber, et cetera. And then lastly, we'll get inflation data from China. So that Covid reopening, is that gonna create the inflation that we've seen on this side of the world, in China this year?

[00:06:07] Sheldon MacDonald: So as always, lots to keep us interested and we look forward to speaking to you next week.