Monday Espresso Podcast 9th January 2023

[00:00:00] Sheldon MacDonald: It is the 9th of January today. A pretty strong week last week across the equities and bond markets. Pretty strong start that means then for multi-asset investors in general. This was the thing last year that both equities and bonds were going down together, at least last week, so far, we've seen things going up together.

[00:00:18] Sheldon MacDonald: The focus as has become almost traditional in the last couple of months, is on inflation and the prospects for growth or recession. Let's start in the US.

[00:00:28] Nathan Sweeney: Yeah, so we actually had some interesting news last week, so we had the jobs report out in the US, so this is the employment report, and you saw that there was over 223,000 jobs added in December, so quite a healthy jobs market in the US.

[00:00:45] Sheldon MacDonald: Now that sounds pretty strong, but we've seen some pretty high-profile layoffs. I think Amazon was the latest last week to announce some pretty hefty layoffs.

[00:00:52] Nathan Sweeney: Yeah, so we are seeing layoffs in the tech space, but what you're seeing is that a lot of service companies are still hiring at a very fast rate.

[00:01:00] Nathan Sweeney: And actually, if you look at the number of jobs that were generated last year, you had 4.5 million jobs generated in the whole of 2022, and that's the second-highest annual total on record.

[00:01:13] Sheldon MacDonald: So a pretty strong picture. The US market also hitting a record low unemployment number, and as we've mentioned, the strong hiring, despite that though, we saw wage growth actually cooling.

[00:01:24] Nathan Sweeney: Yeah, so this is the interesting point because a lot of people are concerned about inflation getting out of control because if inflation go goes up, wages go up to compensate for that, and then you get this inflation spiral. So interestingly, we're seeing wage inflation coming down. So why is that?

[00:01:42] Nathan Sweeney: The reality is more people are coming back into the labour force, so the labour force participation rate increased. So again, this is quite positive because it can mean that inflation can actually come down and stay down.

[00:01:57] Sheldon MacDonald: Now speaking of inflation, we did see the oil price come lower last week, actually quite a long way down, about 8% lower.

[00:02:03] Nathan Sweeney: Yeah. So, a big move in the oil price. So, what's driving that?

[00:02:06] Nathan Sweeney: And this is all around China because you know. China's one of the biggest consumers of oil, we have reopening in China, post Covid, and the expectation was there was that obviously China will start to consume more oil, but as we know, you're seeing a resurfacing in soaring covid infections in China, and as a result of that, that's going to lead to lower oil demand.

[00:02:29] Nathan Sweeney: Additionally, you have India, which is also another big consumer of oil and India's growth for 2023 is expected to be lower than 2022. Which again means less consumption of oil, and that's why you saw an 8% fall in the oil price last week. So, oil closed out last Friday at $73 a barrel.

[00:02:52] Sheldon MacDonald: Let's stick with the inflation theme, that oil price helping to bring down inflation pretty much across the board but in particular, the Eurozone.

[00:03:00] Sheldon MacDonald: Eurozone inflation announced last week, 9.2% versus an expected 9.7%. So quite a long way below expectations. That's really positive for Europe and the oil price in particular positive for Europe because their inflation has been driven so much by energy prices and also their outlook, the prospects for a recess in Europe, so much driven by that.

[00:03:22] Sheldon MacDonald: So let's turn to the recession front. We've got UK GDP announcement coming up, but ahead of that, we did see retail sales numbers out. The Christmas trading period seems to have been pretty positive across the board here in the UK.

[00:03:35] Nathan Sweeney: Yeah, so there's been a lot of talk about recession, but the reality is there's no real sign of a recession coming through.

[00:03:41] Nathan Sweeney: You're seeing lots of people being hired. You're seeing people spending. Consumer confidence is picking up. Retail spending is picking up. We do have GDP figures out in the UK this week, and this is your barometer for recession. So, the definition of a recession or a technical recession is two quarters of negative GDP growth.

[00:04:03] Nathan Sweeney: GDP in the UK for Q4 is expected to come in at 0.1. So, this is just barely positive. You know, the way I would look at it, if you see obviously a big fall in GDP, this would signal a deep recession. If you see a slight fall in GDP, this would signal a moderate recession, which you could argue is already priced in because markets have been expecting this.

[00:04:30] Nathan Sweeney: So therefore, you should expect to see more positive outcome in markets if we don't get that deep recession.

[00:04:37] Sheldon MacDonald: So certainly, lots to think about at the moment. This returning back to our inflation theme, we're getting US inflation numbers out this week, and also central bankers, several of the members of the US Fed speaking this week.

[00:04:49] Sheldon MacDonald: So perhaps giving us an indication as to what to expect, you know, in terms of Fed rates in the weeks ahead. People are starting to think about, are they ready to pause? Are we going to see a pause just yet? Probably not a pause this round. Probably a couple of hikes in store for us just yet, but perhaps by the middle of the year, or perhaps even earlier, we do see them stop to think about what they might do in the months ahead.

[00:05:12] Sheldon MacDonald: So, lots to think about, as always, an exciting market. Let's hope for more positive news going forward. Thank you.