Monday Espresso Podcast 8th August 2022

[00:00:00] Sheldon MacDonald: It is the 8th of August. Let's start off with the US where we know that technically the economy there is in recession.

[00:00:07] They've had two consecutive quarters of negative growth, which is, as I say, the technical definition of a recession, but yet the data that we're seeing, isn't really consistent with that.

[00:00:16] We've got really strong jobs numbers. We've got company earnings, continuing to grow, not really as I say, consistent with an economy that's in retreat.

[00:00:24] Nathan Sweeney: Yeah as Sheldon has said, there's a great debate happening at the moment. Are we in recession in the US or are we not? The reality is it's not a recession until the National Bureau of Economic Research comes out and states it's a recession.

[00:00:38] The reason being, they like to look at a number of different data points to consider, are we in a recession or not?

[00:00:44] So they look at jobs numbers, personal income and consumer spending. And considering the fact that we had extremely strong jobs growth in July, it looks like we're probably not in a recession because people are hiring.

[00:00:59] Sheldon MacDonald: Yeah, over 500,000 jobs created. That was double the expected level. We've got unemployment at 3.5% In the US and that's the lowest since the 1960's.

[00:01:09] Wage growth over 5%, it's been that level for three months in a row now. So really strong numbers that we seen, but yet the economy, as we said, has shown two quarters of decline.

[00:01:21] The other interesting fact last week though, perhaps indicating the weaker demand, is the fact that we've got an oil price that's declining as well.

[00:01:28] Nathan Sweeney: Yeah, so we're getting mixed signals in markets at the moment, because if you get a strong economy or strong jobs numbers, it increases the likelihood of interest rate rises.

[00:01:39] So this causes concerns for the markets because that could lead to a recession.

[00:01:43] So what you're seeing is that the oil price did fall substantially. It's fallen below that $90 of barrel mark. So that's the first time we've seen prices below $90 since the invasion of Ukraine by Russia.

[00:01:58] So there was a substantial drop last week, oil was off close to 10% and basically investors are concerned about the global economy slowing and that equaling less demand for oil.

[00:02:11] Sheldon MacDonald: The other concern that markets have is the fact that perhaps we haven't seen the impact of the rate hikes. Remember, just two weeks ago, we saw the latest rate hike from the us 75 basis points for the second time running, so perhaps the impact not yet felt.

[00:02:26] Lets segway across to the UK while we're speaking about rate hikes, and we did see the 50 basis point rate hike here last week.

[00:02:32] Perhaps more concerning were the dire warnings by the governor of the Reserve Bank telling us about the story here in the UK warning about negative growth for 2023. Unemployment to reach 6% in the next couple of years, inflation 13% expected this year.

[00:02:49] So some very strong warnings coming through from the Bank of England.

[00:02:54] Nathan Sweeney: Yeah, definitely, if you look at interest rates now, we talked about the fact that they've raised interest rates by 50 basis points or 0.5%, interest rates are now 1.75%, so this isn't really good for mortgages and buying houses and all of these rate rises are starting to feed through and starting to slow down some elements of the economy.

[00:03:14] Actually we will get some insight into that later this week on Friday, because you do have growth figures for the UK out on Friday.

[00:03:24] Sheldon MacDonald: Yes that'll be the Q2 growth figures. Q1 was surprisingly strong, but remember that was always backwards looking, so perhaps at that point, not yet having seen some of the impacts of the slowdown.

[00:03:36] In the meantime though, markets largely shrugging this off, a fairly mixed week around the globe, but generally slightly positive. As I say, markets more or less shrugging things off.

[00:03:46] Going back to the US, I mentioned the company earnings, company earnings still growing, perhaps not quite as much as analysts have expected, but still companies managing to grow and actually it's a record earnings figure coming out for the US.

[00:04:01] What we haven't seen yet is company earnings decline. We have seen analysts forecast, expected earnings for Q3 and beyond coming down, but we wait to see how those come out in the months ahead.

[00:04:14] The other thing to speak about perhaps on a geopolitical side is the jitters in China and Taiwan and we did see some reaction there from markets.

[00:04:22] Nathan Sweeney: Yeah, so if we look at one of the weaker markets this week, it was actually the Chinese stock market, and this is almost similar to Europe, when we had the invasion of Ukraine by Russia, European markets, or the markets closest to the epicenter, tend to be weaker.

[00:04:37] So you can see that obviously playing out within the Chinese stock market last week.

[00:04:41] Sheldon MacDonald: And again, closer to home, we've got the race for Prime Minister here in the UK. So far markets really seem to be shrugging that off, I guess, until we get a clearer picture of the policies of the two candidates, perhaps at that point, we'll start to see markets react.

[00:04:57] Really what's going to play out is going to be the tax policy, tax versus growth versus spending, so we wait and see in the coming weeks as those plans finalise.

[00:05:07] And then finally, just a note on ESG, we reported last week, on the bill going through the US, which will really push the climate agenda, that bill having passed the first milestone having been approved in the Senate.

[00:05:20] Nathan Sweeney: Yeah, so that bill is $700 billion in size. The majority of that money is going to be dedicated to climate and clean energy programs, so approximately $369 billion of that.

[00:05:31] There were a couple of other little snippets that were important. One is that they're looking to apply a 15% minimum tax on large companies and also a 1% tax on share buybacks.

[00:05:43] Sheldon MacDonald: So share buybacks, really having been one of the drivers in the last decade of the stock market, so it'll be interesting to see if that has any impact.

[00:05:52] Anyway, as always plenty going on. And we hope you'll dial in again next week. Thank you.

[00:05:57] Nathan Sweeney: Thank you. Bye-bye.