Monday Espresso Podcast 6th March 2023

[00:00:00] Sheldon MacDonald: It is the 6th of March today, while February was pretty weak for markets across the board, March has started off pretty strongly. We saw a nice solid undertone to markets last week. Nathan?

[00:00:11] Nathan Sweeney: Yeah, so it was a very good week for equity markets last week. If we look at the FTSE was up over 1% with the S&P was up 1.6.

[00:00:19] Nathan Sweeney: Europe had a very impressive week up over 3%, and even China was up over 2%.

[00:00:24] Nathan Sweeney: So a good start to the week and specifically looking at China, it looks like that economy is reawakening, post covid. The expectation there is that that economy's gonna grow by about 5% this year. So some good news on that side too.

[00:00:38] Sheldon MacDonald: Yeah, the papers were taking the view that the 5% is a lower target than they've had for many years, but still 5%, in the context of, you know, western markets, that's still pretty strong.

[00:00:48] Sheldon MacDonald: Part of the reason for Europe doing so well is that Europe and China are big trading partners, so the knock on effects being felt around the globe.

[00:00:57] Sheldon MacDonald: On the back of this more positive undertone, we saw the PMI's rising. Now we speak about PMI's a lot they're the first indicators that we get.

[00:01:05] Sheldon MacDonald: It is soft data versus hard data, so it's soft data indicating that it's based on surveys on senti. The PMI is the purchasing managers index, various managers of companies are asked how they expect the future to unfold, and we're seeing positive readings pretty much around the globe.

[00:01:23] Nathan Sweeney: Yeah, so the interesting points here is that if you looked at PMI's or these surveys that were conducted towards the end of last year, you could see that they were coming under pressure, as in all these managers were saying, actually, we're gonna be buying less stuff. Actually, costs are going up.

[00:01:39] Nathan Sweeney: But what happened was all these big energy bills that people were expecting to come through never materialized because we didn't get the big, bad winter. We didn't get the big bad gas bills, therefore we didn't get the cost, which is associated with that.

[00:01:53] Nathan Sweeney: And now what that has meant is that all of these PMI readings are now a bit more optimistic coming into this year. So we're starting to see a glimmer of better news in 2023 versus 2022, hence the positive reaction in markets.

[00:02:10] Sheldon MacDonald: So growth expectations picking up, unemployment staying pretty low, job openings still way outnumbering the number of unemployed. So again, there we've got that positive trend in the growth situation.

[00:02:21] Sheldon MacDonald: Of course, there is this good news is bad news narrative that we've seen because what that does mean is that potentially central bankers need to hike rates by more than we'd begun to hope for.

[00:02:33] Nathan Sweeney: Yeah, but there is some good news there too. So what we're seeing is a bit of a change in language coming from central bankers.

[00:02:39] Nathan Sweeney: So we had Andrew Bailey out last week, ultimately saying that, you know, everybody's expecting that the central bank is gonna keep increasing interest rates because inflation is high and he's saying that's not necessarily the case.

[00:02:52] Nathan Sweeney: So he's saying, actually we could pause here or we might have to increase. It's gonna be data dependent, but the fact that he stated that, means that he's giving himself a little bit of leeway because inflation is coming down and that just means that they're likely to start to pause that interest rate rising cycle very soon, if not at the next meeting.

[00:03:11] Nathan Sweeney: So good news on that front too.

[00:03:14] Sheldon MacDonald: We do know, of course, that interest rate hikes do act with a lag, so you know, we have had a pretty significant rate hike cycle already. So perhaps the central bangers will just pause, wait, and see what the lagged effect will be.

[00:03:26] Sheldon MacDonald: In the meantime, more focused on equities or on companies.

[00:03:31] Sheldon MacDonald: What we have seen is earnings forecasts start to come down, especially in the US, that's where we get most data from. The forecast coming down, but not by as much as we've seen in previous recession cycles, so some positive news there.

[00:03:45] Sheldon MacDonald: And the other point is that on the bond side, on the fixed income side, credit spreads are not really widening as you would expect to see if the market was anticipating a recession.

[00:03:55] Sheldon MacDonald: So it seems like that narrative of recession this year is also changing, perhaps there's a reasonable, if not a pretty good chance that we might get the soft landing that we'd hope for.

[00:04:06] Sheldon MacDonald: So a busy data week. Looking at the week ahead, as you said, Nathan, the central bankers certainly keeping their eye on the data.

[00:04:13] Sheldon MacDonald: What have we got to look forward to?

[00:04:15] Nathan Sweeney: Yeah, so there's actually quite a lot of data coming out this week, so if we take a look at the UK first, we've got things like GDP figures coming out, we've got manufacturing and production data, we've got construction output.

[00:04:27] Nathan Sweeney: We've also got housing data, again, which is in focus obviously, because mortgage rates have gone up and housing prices are under pressure so people will be looking at that but the key figure to focus on is obviously the GDP print.

[00:04:40] Nathan Sweeney: Everybody was concerned about a recession. It looks like the economy is going to deliver some stronger growth for January, so an expectation that we get growth of 0.5% or half a percent, so again, no recession in sight.

[00:04:55] Nathan Sweeney: We also get GDP figures for the Euro zones so we will get a glimpse as to what's happening in that economy plus retail sales, but the big focus for the US actually this week will be the jobs report, because the jobs market has been pretty strong and people will hope that that still remains the case and it looks like it probably will.

[00:05:12] Sheldon MacDonald: So, as you said, lots to look at, lots for us to talk about, lots to stay interested.

[00:05:17] Sheldon MacDonald: Speak to you next week.