Monday Espresso Podcast - 6th June 022

[00:00:00] Sheldon MacDonald: It is the 6th of June today. We're joined today by Gurjit with a focus on the European front, Gujit some inflation numbers out of Europe last week?

[00:00:08] Gurjit Soggi: Okay, so we had inflation data released in Europe last week with the region recording 8.1% increase. This was a new record for the block and was ahead of forecast for a 7.7% increase.

[00:00:22] The spike in energy prices, was a significant contributor with the impact of energy on inflation being twice as large in the Euro area, as it is in the US, this in turn means that the ECB will likely speed up the withdrawal of ultra loose monetary policy and probabilities have increased that we will get back to back rate increases this year in a quarter of a percent increments.

[00:00:48] Some of the more hawkish members of the ECB governing council, indicated a preference for a more aggressive response, more in line with that of the Fed. Favoring half a point increases of a percentage increase.

[00:01:01] That said, Christine Lagarde has urged it to move more gradually favoring 25 basis point increases in the July and September meetings.

[00:01:11] Sheldon MacDonald: Inflation still in the headlines, certainly in Europe. What about in the US Nathan?

[00:01:16] Nathan Sweeney: Yeah, so we're definitely seeing a different dynamic at play in the US where it appears that inflation has peaked.

[00:01:23] So if we look at inflation in the US, we hit a level of 8.5%. The most recent reading has actually been 8.3%. So you're seeing a different dynamic at play between the different regions, and you would expect that because the drivers are different in different regions for inflation.

[00:01:40] But I suppose the key question is, will we start to see a trend of inflation peaking, even though there are slight differences between the different regions?

[00:01:48] Sheldon MacDonald: Probably not likely to see a peak in inflation on the European front, especially with all the political moves around gas and energy prices?

[00:01:56] Gurjit Soggi: Yes, that's right, inflationary pressures are likely to persist in the Euro area, given the risk of a ban on gas exports to the region. This is even more likely following the decision by the EU council last week to implement a ban on Russian oil imports by the year end this, in term, will mean a 90% drop in oil imports to the area.

[00:02:18] Sheldon MacDonald: So clearly a difficult picture there, in the meantime though, OPEC with some announcements of their own?

[00:02:24] Nathan Sweeney: Yeah, so I think this will largely offset some of the disappointing news on the oil front.

[00:02:28] So OPEC have come out and said that they're looking to increase oil production. So currently OPEC pumps about 400,000 barrels of oil a day.

[00:02:37] They're looking to increase that significantly to 650,000 barrels of oil a day, so that should offset the lack of supply coming from Russia and should help to stabilise the oil price, which again will be good for inflation as in lower inflation.

[00:02:52] Sheldon MacDonald: Let's do a quick segway from oil onto the ESG front. ESG was in the news again last week, Nathan?

[00:02:58] Nathan Sweeney: Yeah, so it staff could see ESG coming to news for all the wrong reasons, so we saw that the German authorities raided the office of Deutsche Bank, and that was on the news of potential greenwashing on some of the products that they have. So basically not doing what they say they're doing. So again, that's kind of a blow for the ESG side of things.

[00:03:18] Sheldon MacDonald: Let's bring it back to our main topic of the week, which is inflation. Clearly, as we mentioned at the start, the focus still very much on inflation and monetary policy tightening. Much as people want to almost move beyond that and start to think about whether or not the Fed can engineer a soft landing.

[00:03:34] Whether we can get reduction in inflation levels back down to realistic levels without ending up in recession. Much as investors want to focus on that, clearly the focus still is on inflation and what's coming now.

[00:03:45] On that front, looking at the week ahead we do have the ECB meeting, right Gurjit?

[00:03:52] Gurjit Soggi: The ECB are meeting this week, but all expectations are that they won't begin raising rates until the July meeting with expectations of a peak and rates of 1.5% in early 2023.

[00:04:06] Sheldon MacDonald: So not achieving liftoff just yet, at the moment still tightening policy through the withdrawal of their bond buying program, but as you say, market expecting rate hikes only to start in the next meeting. How about in the US Nathan?

[00:04:20] Nathan Sweeney: The US this week, we have inflation data and obviously inflation is a big focal point for markets, so that would be an important reading, that data comes out on Friday.

[00:04:28] Anything lower will be seen as a positive, inflation is currently 8.3% and it's expected to come out at around a seminar. So obviously if we see a disappointment on that side markets, won't like it, but if inflation moves lower, perhaps that's the beginning of a trend of lower inflation, because that'll be a couple of months of lower readings.

[00:04:48] Sheldon MacDonald: Of course the employment market's still red hot, so that's keeping the economy buoyant and perhaps allowing inflation to continue at these high levels, so we've got this tug of war between inflation and jobs growth and employment.

[00:05:02] Anyway, lots going on, let's leave it there for the week. Lots to look at lots to speak about, and let's hope we have a good week in markets.

[00:05:09] Thank you. Cheers.

[00:05:10] Nathan Sweeney: Bye-bye.