Monday Espresso Podcast 9th May 2022

[00:00:00] Sheldon MacDonald: It is the 9th of May. Good morning, Nathan. Another fascinating week in markets last week.

[00:00:05] Nathan Sweeney: Yeah. So quite a volatile week actually for markets, I think we focus in on the US first.

[00:00:10] Nathan Sweeney: We did see news of the biggest market up day last week for the year and the biggest market down day for the year.

[00:00:18] Nathan Sweeney: So this obviously gathered lots of attention during the week that focus on volatility.

[00:00:22] Nathan Sweeney: But interestingly, if you look at the returns for the S&P for the week, the market was only down 0.2%.

[00:00:30] Sheldon MacDonald: So yes, volatility intra-week, but not too much.

[00:00:33] Sheldon MacDonald: Well. The week itself, that volatility really on the back of what was the biggest talking point of the week, which was the Fed's meeting.

[00:00:40] Nathan Sweeney: Yeah, so the US central bank came out and they raised interest rates as expected.

[00:00:45] Nathan Sweeney: So they raised interest rates by half a percentage point.

[00:00:48] Nathan Sweeney: So why the volatility in markets?

[00:00:51] Nathan Sweeney: So when they raised interest rates, they talked about the fact that they weren't going to raise interest rates by 0.75% at the next meeting.

[00:01:00] Nathan Sweeney: So three quarters of a percent and the market liked this, but the following day, we had some data out which implied that inflation is still around, it's still ever-present the market sold off because the market is thinking, has the Fed got this right?

[00:01:14] Nathan Sweeney: So will they actually need to increase interest rates more aggressively than they currently anticipate? So that's the real reason behind the volatility we saw in the week.

[00:01:23] Sheldon MacDonald: Now, the reason that they may not need to raise rates as quickly as feared is that perhaps they're seeing some of the inflation pressure starting to ease.

[00:01:32] Sheldon MacDonald: Now in the short term, we still had the oil price up again last week, up to about $110 now, but perhaps looking further out some easing on the horizon.

[00:01:41] Nathan Sweeney: Yeah, so if you think about what's been driving inflation and the excused upon that it has been people buying cars.

[00:01:47] Nathan Sweeney: So spending on new cars, spending on secondhand cars and we all know that once you buy a car, you're not likely to buy another car in two months time. So it's kind of a one and done investment.

[00:01:58] Nathan Sweeney: So what we expect is that, you know, the spending that has happened in that segment of the market will decline.

[00:02:04] Nathan Sweeney: And then secondly shelter, so people spending on housing. Now housing is going to be linked to mortgage rates.

[00:02:12] Nathan Sweeney: Mortgage rates are rising because the interest rates are rising, which tends to cool housing. So those areas of inflation should start to soften, which should lead to lower inflation.

[00:02:21] Sheldon MacDonald: Now, despite that the weakness in equity markets this year on the US side in particular, perhaps pricing in fears of recession.

[00:02:30] Sheldon MacDonald: On the other hand, we've got a labour market that is still very tight and indicating that the economy actually is still pretty strong.

[00:02:36] Sheldon MacDonald: Companies are still creating jobs and they are still paying up for people.

[00:02:40] Nathan Sweeney: Yeah. So actually, if you look at one of the most powerful drivers of economic activity is employment.

[00:02:46] Nathan Sweeney: And if we look at the unemployment rate, it is at extremely low levels, so 3.6%.

[00:02:51] Nathan Sweeney: So last week we had confirmation that employment is still quite strong in the US, we had 428,000 jobs. That means that we've had 16 months of continued expansions. So that's quite a positive.

[00:03:05] Sheldon MacDonald: We've also got a tight labour market here in the UK.

[00:03:08] Sheldon MacDonald: We saw figures last week, wage growth here, 5.4% and that likely to stay high because at the moment there is apparently only one person available for each vacancy, for each open job that's around.

[00:03:21] Sheldon MacDonald: So the labour market here in the UK also still tight knock on impacts, potentially for company margins.

[00:03:26] Sheldon MacDonald: It will also keep the pressure on inflation, but that wage growth level is still below inflation levels. So consumers will still be feeling the pinch and that potentially leading to lower growth and hence those recession concerns that I mentioned earlier. It's worse over in Europe.

[00:03:43] Sheldon MacDonald: In Europe, the equity markets definitely pricing in recession, a stat that we've seen today, very clear that the closer you get to Russia, the worse things are.

[00:03:53] Sheldon MacDonald: The Polish market down 28% for the year, the German market down 22%, France is down 17%, Spain down 7%, and the UK market flat to positive for the year.

[00:04:05] Sheldon MacDonald: It's not all doom and gloom though, on the bond side, we do see some positive indications. The bond market, still not yet pricing in these recession risks, in particular, we're looking here at corporate bond spreads.

[00:04:17] Sheldon MacDonald: So the additional cost of finance for companies relative to their sovereigns. Now corporate bond spreads at the moment, still trading tighter than their long-term averages.

[00:04:28] Sheldon MacDonald: So again, as I say, an indication that the corporate bond market not yet pricing in that recessionary fear. Something that we mentioned last week is the weaker Sterling continues to help out Sterling based investors.

[00:04:42] Sheldon MacDonald: Sterling weaker again last week and that actually turned some of the negatives into positives. So while the US market, in local terms was negative, for a Sterling based investor, the S&P 500 was up one and a half percent.

[00:04:54] Sheldon MacDonald: So that weaker Sterling will also be a positive for the FSTE 100. The FTSE 100 garnering most of its revenues offshore and when those get translated back at a weaker Sterling rate, that equals higher profits.

[00:05:08] Sheldon MacDonald: So definitely some positives to take out of the current situation still remains a fascinating point in the markets, lots to speak about. This week, we've got inflation data coming out, of course.

[00:05:18] Sheldon MacDonald: On the geopolitical front, there's the May parade in Russia. We'll see if Putin uses that as an opportunity for escalation. We certainly hope not, but definitely lots going on, lots to look out for and we hope to speak to you again next week. Thank you.

[00:05:32] Nathan Sweeney: Thank you.