Monday Espresso Podcast 7th November 2022

[00:00:00] Sheldon MacDonald: It is the 7th of November today, another busy week in financial markets. What we're going to do today is just focus a little bit on the big moves that we've seen in the last couple of weeks in Central Bank land. So the first of the central banks that we've seen in the last couple of weeks, actually not last week, but the week before was the European Central Bank.

[00:00:20] Sheldon MacDonald: Gurjit, give us your take on what they said to us.

[00:00:23] Gurjit Soggi: So in the monetary policy meeting, the European Central Bank took the decision to increase interest rates by three quarters of a percent, and this follows a similar move a month earlier. This takes the key interest rate from 1.25% to 2% for the Euro area, and has resulted in borrowing costs, reaching their highest level since early 2009.

[00:00:49] Gurjit Soggi: The move was widely anticipated and came on the back of an increase in inflation to double digits reaching 10.7%, and this follows on from a reading of 9.9% a month earlier. That said, President Lagarde announced that substantial progress has been made in removing accommodation, and the comments were designed to prepare markets for a slow down in rate rises to half a percent in December.

[00:01:17] Gurjit Soggi: We expect that the ECB will tread cautiously with a desire to avoid the turmoil experienced in the UK bond market following the announcement of the mini budget.

[00:01:28] Sheldon MacDonald: Turmoil indeed. Now, those comments by Christine Lagarde, as well as some previous comments from members of the US Fed had started to lead people to expect perhaps that we might see a pivot away from the ultra dovish stance.

[00:01:43] Sheldon MacDonald: In the Feds meeting, that happened last week, markets were left a little bit confused though in the meeting they did raise by 75 basis points in the US, that's the fourth time in a row that they've done that, taking US rates to 4%. But Jerome Powell in the press conference afterwards did say that they would consider policy lags, so perhaps slowing the rate of future hikes, which itself gave people some confidence.

[00:02:08] Sheldon MacDonald: On the other hand though, he did also say that they expected the peak rate to be reached, that would actually be higher than previously been expected. So, as I say, giving some cause for concern and mixed messages there, and then we had the UK Central Bank. Raj?

[00:02:25] Raj Manon: It was a contrasting message from the UK, although the UK did lift interest rates by the same amount, 75 basis points.

[00:02:34] Raj Manon: Five NPC members voted to lift interest rates by that 75 basis points to 3%, which is the highest level in 14 years. It was actually interesting that two members voted for a lower increase. There was also accompanying guidance from the bank governor suggesting that rates would go higher, but the pace of increases would be slower and shallower.

[00:02:59] Raj Manon: This, therefore suggesting that the hikes being priced into the markets were too high and peak rates in the UK would actually be lower. So these comments were seen as dovish and put further downward pressure on the pound, especially coming a day after those hawkish comments from the Fed, where they suggested that rates would go higher than previously expected.

[00:03:22] Sheldon MacDonald: Yeah, so mixed messages and normally that uncertainty would lead to negative markets, markets don't like uncertainty, but actually it was a pretty strong market all round except for the US. The US losing around about 3% in dollar terms, that's the S&P 500 last week. Elsewhere though it was pretty strong.

[00:03:41] Sheldon MacDonald: Markets led higher actually by Asian and emerging markets in a rebound after the previous week's negative moves following the, the National Congress. Some rumours that perhaps the zero Covid policy might be rescinded, those rumours later denied. What we did have last week was further earnings results out of the US. We've had 85% of companies have reported.

[00:04:05] Sheldon MacDonald: Slightly disappointing results. What we've seen at the moment is 70% of companies beating their earnings. The average there is usually about 75% of companies beat their earnings, and the average earnings beat is by 1.9%, so 1.9% ahead of expectations, and usually the average is around about 7%. On the other hand though, on the revenues front, we've got companies beating revenues, a greater proportion than average beating revenues, and by a higher amount.

[00:04:36] Sheldon MacDonald: So that's giving us a view into what inflation is doing. Inflation is allowing companies to increase their prices, so at the top line, they're doing okay, but then that same inflation is eating into their input costs and crimping margins. Looking at the year ahead though, analysts are reducing their forecasts.

[00:04:55] Sheldon MacDonald: They are still flat for Q4, not negative, and analysts still expecting growth in 2023. Again, a positive sign there. Looking at the week ahead, we've got a few moves, we've got inflation figures in Europe. Is that right, Gurjit?

[00:05:12] Gurjit Soggi: That's right, Sheldon. We have consumer price data coming out on Friday and an 11.6% increase is expected, which is in line with a similar reading last month.

[00:05:23] Sheldon MacDonald: Yes, big concerns on inflation. We also get the US CPI out this week and then in the UK, Raj, what have we got coming this week?

[00:05:31] Raj Manon: The main data point this week will be the GDP figures, which will be due on Friday.

[00:05:37] Sheldon MacDonald: UK GDP as well as you say, Let's watch out for that. But the big one this week will be the US midterm elections and perhaps further cause for, for market uncertainty.

[00:05:47] Sheldon MacDonald: But we'll see how that plays out during the week, and we look forward to speaking to you again next week.