Monday Espresso Podcast - 11th April 2023

[00:00:00] Sheldon MacDonald: It is the 11th of April today. We had a mixed picture last week for the economy and the data readings that came out last week, some bad news, some more positive news. So let's get the bad stuff out of the way.

[00:00:11] Sheldon MacDonald: So first of all, some signs of a slowing economy came through. We had PMI readings, that's the purchasing manager's index. We make a song and dance about this because it's the earliest indication that we get on the way things are going, and we saw PMI readings slightly weaker, coming down below 50 in the US and the UK below 50 indicates retraction, recessionary levels, and also we had jobs growth that was weaker than it had been in the past.

[00:00:38] Sheldon MacDonald: Remember, we've seen a really strong surge in in growing jobs, especially in the US and that number's starting to normalize now. And then finally, on the bad news front, we saw some earnings forecasts being reduced, being cut ahead of the Q1 earning season. We will see earnings start to come out this week.

[00:00:56] Sheldon MacDonald: So that's the negative side of things. Nathan, what about the positive side?

[00:01:00] Nathan Sweeney: Yeah, actually there's, there's some positive in those negatives. So let's start with the jobs report first. So we know that, you know, coming out of Covid, you obviously have a lot of companies hiring at a very high pace.

[00:01:12] Nathan Sweeney: Now, the pace of that hiring is slowing, as you'd expect, but if you look at the unemployment rate, it's still quite low and it actually fell when you look at the numbers, so it went from 3.6% to 3.5%.

[00:01:25] Nathan Sweeney: Additionally, if you look into the numbers in a bit more detail, you can see that wage inflation was lower. So if wage inflation continues to go up, that's a problem for central bankers because they're trying to stamp out inflation. But the fact that it's coming down means that that will help to alleviate some of these inflationary concerns.

[00:01:45] Nathan Sweeney: So definitely some good news on that side. And we also get inflation data out this week. So, you know, that's been the big thing that the market has been focusing on all of last year. Inflation is currently 6% in the US and that reading is expected to come in at 5.2%.

[00:02:02] Nathan Sweeney: What you're seeing is inflation is continuing to fall, so that's good news for markets and actually, if we look across to Europe, we had a number of different members of the ECB coming out and talking last week and you know, the thing they were focusing on is that you've seen rate rises in the US and the UK and in Europe, they're expected to, as is the Bank of England is expected to stop raising rates in the UK.

[00:02:25] Nathan Sweeney: The Central Bank of the US is also very close to the peak in its rate hikes, but the ECB was expected to continue to raise rates, now you're getting these mixed signals coming out from the central bankers in the ECB saying that actually maybe we don't have to increase interest rates.

[00:02:40] Nathan Sweeney: So I think this is good news too, so you're getting that dialogue happening where there's difference of opinions on rates, which means we're probably close to the top in the rate rising cycle in Europe too. So lots of good news out there as well.

[00:02:51] Sheldon MacDonald: Certainly good news there, as you say, some people saying that it's an outside chance that we might even get rate cuts in the US as early as July.

[00:03:00] Sheldon MacDonald: Certainly that, that would be good news. Another positive that we saw last week has been the fact that corporate bond spreads have not reacted too much.

[00:03:08] Sheldon MacDonald: So corporate bonds, the credit spread, the risk, the price that you demand for taking the extra risk of buying a corporate bond, that spread hasn't widened out and normally that might be one of the first warning signs that you'd see if the market really was expecting a a negative period.

[00:03:24] Sheldon MacDonald: So those corporate bond spreads, the fact that they've been relatively stable is another positive for us.

[00:03:30] Sheldon MacDonald: So I guess we're still in wait and see mode, so hopefully things become a little bit clearer through the course of this week, as Nathan mentioned, we get inflation figures coming out and also we'll start to see some earnings results as were mentioned, Q1 earnings season kicks off and we start to see companies in the US releasing their figures this week.

[00:03:49] Sheldon MacDonald: What else have we got to look out for?

[00:03:51] Nathan Sweeney: Yeah, I think within the company earnings specifically, it'll be the banks who start reporting first that'll be towards the end of this week and the market will really focus on what the banks have to say as you might remember, the banks have been in the headlines quite recently because of the collapse of SVB Bank.

[00:04:08] Nathan Sweeney: Will that impact other banks? We know that some depositors have been taking their money out of some of the big banks so definitely the market will be interested in what they have to say and will any of the instances that we've had over the last couple of weeks impact these companies and their earnings going forward?

[00:04:25] Nathan Sweeney: So you'll hear from the likes of Citigroup, Wells Fargo, JPM, Bank of America. So the market will be focused on that.

[00:04:31] Nathan Sweeney: If we look at the UK, actually, we've got growth figures coming out so GDP growth, there have been a lot of concerns about recession, but the reality is there's no real sign of a recession yet. If we look at economic growth, it's been quite stable.

[00:04:43] Nathan Sweeney: The expectation is that the UK economy grew by 0.2 of a percent. So not stellar growth, but not terrible growth and that's what the market will be focused on.

[00:04:54] Sheldon MacDonald: So as always lots to look out for, and we look forward to speaking to you again next week.