Marlborough Monday Espresso - 10th October 2022

[00:00:00] Sheldon MacDonald: It is the 10th of October. Last week, we had a slightly better week after the previous week's volatility.

[00:00:06] Sheldon MacDonald: I guess an absence of very bad news saw markets able to stage your recovery both on the equity side and in most of the bond markets as well.

[00:00:15] Sheldon MacDonald: Couple of conflicting stories though, coming out on the inflation front, Nathan?

[00:00:19] Nathan Sweeney: Yeah, so it's definitely a good start to the third quarter.

[00:00:22] Nathan Sweeney: So we saw that the Bank of Australia came out of the beginning of the week and they increased interest rates less than expected.

[00:00:30] Nathan Sweeney: So the market took this as a real positive sign that they have inflation under control in Australia, and that could be a sign of things to come for other regions, and that's why you saw markets getting off to a very good start at the beginning of the week.

[00:00:44] Nathan Sweeney: However, we had some other data coming out towards the end of the week, particularly unemployment data in the US, which showed that people are still getting jobs, the unemployment rate has come down. But the reality is, that is seen to be inflationary.

[00:00:59] Nathan Sweeney: So you have this ebb and flow of data, is inflation coming down? Is inflation going up? And that's what's creating the volatility in markets today.

[00:01:08] Sheldon MacDonald: Of course, on the inflation front also, last week we saw OPEC announcing oil cuts and we saw the oil price staging a 15% rally in the week.

[00:01:17] Sheldon MacDonald: Breaking a long run down trend, really since a couple of weeks after the start of the Ukraine war, we've been seeing the oil price trending lower.

[00:01:25] Sheldon MacDonald: So that's again, as you say, creating these mixed messages on the inflation front, and that's really leading to the volatility. Markets just don't know how things are going to play out.

[00:01:35] Sheldon MacDonald: This week or this past week has been a positive one as we stage that recovery after difficult week, the previous week.

[00:01:43] Sheldon MacDonald: Another side of the volatility story is geopolitics, and of course over the weekend we saw a ramping up of tensions in Ukraine with that bridge being hit and then retaliatory strikes in Kyiv.

[00:01:55] Sheldon MacDonald: The other thing, perhaps largely I noticed was North Korea testing missiles again, sending missiles over Japan. So really a ramping up of geopolitical risks.

[00:02:05] Sheldon MacDonald: You know, something that we've now become used to, but really important to keep that in the back of our mind.

[00:02:10] Sheldon MacDonald: Looking ahead this week, we will see the start of earning season in the US.

[00:02:14] Sheldon MacDonald: Yeah, so this is critical really because people are gonna focus on company earnings this quarter to see what the impact we will have from higher inflation, and obviously the interest rate rises that we've seen over the last couple of months to tackle that higher inflation.

[00:02:32] Sheldon MacDonald: So are those interest rate rises going to impact companies profits or their profit margins? And we get a good, clear view on what that looks like over the course of the next couple of weeks.

[00:02:44] Sheldon MacDonald: So the first companies to report will be financials, so we get an understanding of higher interest rates, typically tend to be good for financials because they can generate more profit from loans and mortgages, but the reality is that those rates have gone up quite a lot.

[00:03:01] Sheldon MacDonald: So that's impacting people's ability to afford mortgages and therefore you're seeing mortgage demand coming down. So, you know, earnings will be quite important this quarter.

[00:03:12] Sheldon MacDonald: Yes, probably more important, not for what has happened, but for the forward looking statements that we get from the CEOs and the CFOs making these announcements.

[00:03:21] Sheldon MacDonald: How do they expect things to play out in the months ahead?

[00:03:24] Sheldon MacDonald: Will they be able to continue to generate the margins that we've become used to?

[00:03:29] Sheldon MacDonald: Of course, a few other points coming out this week. We've got the minutes from the Fed meeting, don't really expect anything other than continued hawkishness.

[00:03:37] Sheldon MacDonald: We know the Fed is on a mission to crush inflation, they need to talk tough and that'll be reflected in the minutes as well. And then we also get inflation data out this week, which again might just give us a closer steer on the direction of travel.

[00:03:51] Nathan Sweeney: Yeah, so particularly with that inflation point, the important piece is that inflation in the US looks like it's peaked at about 9.1%, and the inflation readings over the last couple of months have been coming down lower.

[00:04:03] Nathan Sweeney: So people will really focus on that figure to see, is that trend continuing and that will be positively received by markets if that's the case.

[00:04:12] Sheldon MacDonald: Well, we say that we have seen, as you said, these lower numbers, but they haven't been as low as expected and that's been what's really set the cat among the pigeons in terms of what's going on in bond markets.

[00:04:22] Sheldon MacDonald: So as always lost to talk about. Let's hope for another stable week this week, and we look forward to speaking to you again next week. Thank you.