Monday Espresso Podcast - 13th February 2023

[00:00:00] Sheldon MacDonald: It is the 13th of February, after a really strong start of the year markets finally took a slight pause last week, both on the equity side and the bond side. The big news here, locally at least, last week, was the UK just about avoiding a recession. Got Scott on the line this morning. Scott, your take on that?

[00:00:20] Scott Truter: Yes, so for Q4 2022, UK growth was flat zero. What that meant is that overall for the whole of the year 2022 growth was 4%, and that meant that the UK was one of the strongest growing countries in the G7, but I think the general news is we're not out of the woods yet, and there's still concern around inflation.

[00:00:41] Sheldon MacDonald: That 4% for the year surprised me because the general narrative, or sentiment is just so weak on growth and the potential for recession. Just a reminder that in fact, as you say, for the year as a whole, it's pretty strong. That just reminds us the strength of the rebound that we had early on. As you say though, still not out of the woods, inflation is still lingering above 10%, and so the potential is for further hikes ahead.

[00:01:08] Sheldon MacDonald: Segueing across to the US, we had a lot of central bankers speaking last week. They're very much still talking tough. The key driver there is the fact that the labour market is so tight and with the labour market tight, it's probably unlikely that the economy can get back down to their targeted inflation levels.

[00:01:25] Sheldon MacDonald: Inflation actually did tick up for the quarter in the US, but still trending downwards on a year-on-year basis. Now inflation ticking up in the US but also ticking up over in China.
[00:01:38] Scott Truter: Yep. So China's inflation figure of the year is 2.1% so that's up from 1.8% the previous month, and a lot of that is the expectation driven by the China reopening from their zero covid relaxations, and also from additional consumption because of the lunar New year and people traveling there and there's still an expectation that China is gonna be the big driver for global growth in the economy for this year.

[00:02:04] Sheldon MacDonald: Certainly that China as the driver of growth is one of the strong narratives that has driven the recovery in markets this year.

[00:02:11] Sheldon MacDonald: The other narratives are the fact that the economy is actually in pretty good shape, as I mentioned earlier, we saw that UK growth number, but other economic readings are coming out pretty positive, and we're getting this change of narrative from recession to actually maybe we will just about get a soft landing in Western markets and that driven by that labour and jobs statistics, despite the weaker sentiment, the fact that, you know, we are at pretty close to record unemployment, certainly in the US, also in the UK.

[00:02:41] Sheldon MacDonald: You know, we've got a large number of job openings well above the number of job seekers that puts us in a pretty good position and the fact is that it's unlikely that you get a recession, at least a strong or a deep recession in conditions such as that.

[00:02:55] Sheldon MacDonald: And the final narrative was that perhaps all of the interest rate hikes by central banks had already been priced in.

[00:03:03] Sheldon MacDonald: What the market did last week was perhaps re-question, revisit that statement and wondering whether they are all priced in, perhaps we'd got ahead of ourselves in expecting rates to come down sooner than perhaps they will.

[00:03:17] Sheldon MacDonald: The other big driver last week was earnings results. Now we've had about 69% of companies of the S&P produce their earnings reports for Q4, 69% of the companies reporting have reported earnings that are ahead of expectations, now, you would think that's a pretty good result.

[00:03:35] Sheldon MacDonald: The fact is that that's below the average number of companies that report ahead of expectations. And also the proportion, the amount that they're ahead of their expectations is only 1.1% and again, that's lower than the average earnings beat, and so market players getting a little bit concerned around the, the weakness of earnings.

[00:03:57] Sheldon MacDonald: So a very kind of confusing picture at the moment, we're at the kind of tipping point between growth and recession, we've got earnings reports coming down weaker, but in fact, perhaps they'll trend upwards again if the economy does turn north.

[00:04:10] Sheldon MacDonald: So lots to look out for and that means a lot of the economic data coming out will be closely watched and we've got a, a slew of data ahead this week, mostly on the inflation and unemployment front.

[00:04:21] Scott Truter: Yep. So in the UK we have inflation data out, the expectation at the moment is that still going to be above 10%, but we'll wait to the figures, and there's also unemployment data out for the UK and some retail sales data.

[00:04:34] Scott Truter: Similarly in the US, we've got an inflation print as well, so expecting to see that fall further but what about core inflation and seeing how that comes out as well, and there's also some retail sales data through the US as well, and I think the only other point around Japan has got its fourth quarter GDP data being released as well.

[00:04:53] Sheldon MacDonald: So a slew of data, as I mentioned though, the, the key ones to watch will be unemployment and inflation of course. Just a quick note that we saw the oil price tick up quite strongly last week up around eight to 10%, and that will give inflation hawks something to worry about. Anyway, as always, very interesting times in markets and we hope to speak to you again next week.

[00:05:15] Sheldon MacDonald: Thank you.