Marlborough Monday Espresso: 09/05/2023

[00:00:00] Sheldon MacDonald: It is the 9th of May today with bank holidays and staff absences, I'm afraid I'm on my own today, so bear with me through this monologue. I'll try and keep it as snappy as ever, though.

[00:00:13] A weaker undertone to markets last week, let's start somewhere less traditional, the oil price.

[00:00:18] This was weaker last week, coming down several percent, weaker on the view that economic growth going forward is likely to be lower. That though was slightly at contrast with some of the figures that we actually saw.

[00:00:33] Some of the data that came out, particularly out of the US, we saw the jobs market and unemployment showing pretty strong growth. The payroll data that came out, the strongest level since January this year.

[00:00:46] Now, that led to a view that interest rate cuts are not imminent.

[00:00:51] Markets had started pivoting to a view that we're going to get, you know, several interest rate
cuts through the latter half of this year, but on the back of the economy being pretty strong.

[00:01:01] The view is that perhaps we won't see quite as many of those cuts, or perhaps not as soon, and that itself led to weaker sentiment. This was a case of good news being bad news for markets.

[00:01:13] Perhaps the other reason for some of the weaker undertone, especially out of the US, was the ongoing turmoil or concerns rather, with what's happening in the regional banks there.

[00:01:24] So we spoke last week about First Republic Bank that was taken over by JP Morgan, and we are still seeing some weakness in the regional bank's, investors in that area still pretty concerned.

[00:01:36] We think though, that it's still remains a relatively contained issue. There's no indication that it's going to spill over into being a systemic risk, something that impacts the overall markets.

[00:01:49] Part of the reason for that confidence on our side is that credit markets have been relatively benign, so credit spreads, the extra price you pay for taking on risk of a lower grade credit, those spreads not really blowing out as you would expect to see if the market was overly concerned.

[00:02:07] So that's the undertone to markets. What else did we see last week? Well, we saw the fed raise rates, they raised by 25 basis points, and all indications seem to be that this is the last of the interest rate raising cycle out of the US.

[00:02:22] The Fed members all unanimously agreeing to a 25 basis point rate hike. In contrast to that though, we had the ECB raising rates, also 25 basis points, but there the indications seemed to be fairly clear that we will see further rate hikes out of Europe.

[00:02:40] That's not unexpected, Europe and the UK, both certainly several months behind the US in terms of the cycle, and so we still expect to see further rate hikes on that front.

[00:02:51] This week brings an interest rate decision from the Bank of England. Again, we do expect to see a further interest rate hike here.

[00:03:00] Other news out this week will be the UK's GDP level for quarter one. Now remember the last number we saw was sailing pretty close to the wind, we're flirting with recession here.

[00:03:12] Slight, slight levels of growth. Pretty much the same as expected for Q1.

[00:03:17] Hard to tell whether the clicker will come out slightly above or slightly below zero. We watched that one with interest.

[00:03:24] Now, something else that we spoke about last week was the debt ceiling in the US. Remember, this is the issue where the US have to agree a certain amount, a specific level of debt that they can take on. They're not allowed to borrow any money more than that level.

[00:03:40] That impacts them when they hit that debt ceiling, they can no longer pay things like government payrolls.

[00:03:48] Now, this has gone quite in the past week, we mentioned this in our discussion last week, that we expect a certain degree of brinkmanship to happen here.

[00:03:56] The two parties in the US need to agree to extend the debt ceiling, and so the parties will use it to score political points.

[00:04:05] We do think they will come to some agreement, and assuming they do, it'll then be more of a news story than a market moving story. It'll be more around what are the concessions and the give up's that are needed in order to make a deal, which Har is more eager to do it than the other.

[00:04:21] Where it does become concerning is if they, somehow failed to reach an agreement. At that point, it becomes more severe because as I mentioned, you get things like, you know, the government having to shut down, furloughing people and then you get knock on impacts into economic growth in that area and could even impact the credit worthiness ascribed to US debt.

[00:04:43] So if they somehow failed to agree, as I say, that could be a significant event. This has happened before where they get close to a debt ceiling and every time in the past they have managed to negotiate something. But we do continue to watch the space.

[00:04:57] Time is starting to run out, Janet Yellen has indicated again that it could be in early June that they hit the ceiling and between now and then there are two weeks of recess for either one or both of the houses.

[00:05:11] So very limited time for the politicians there to actually come to an agreement.

[00:05:16] So we watch with interest and we look forward to speaking to you again next week.