Monday Espresso Podcast 14th November 2022

[00:00:00] Sheldon MacDonald: It is the 14th of November already, big news last week was the US's falling inflation number. 7.7% was the reading, that was compared to an expectation of 8% and the previous number 8.2%. Now, we've been arguing for a while that perhaps we have seen the peak in inflation, was this final confirmation of that, Nathan?

[00:00:22] Nathan Sweeney: Yeah, so I definitely think we have seen peak inflation in the US, that's the caveat here. So this is the fourth month in a row that inflation has fallen, and if we look at the underlying numbers, you can see there's a lot of factors contributing to that lower inflation.

[00:00:38] Nathan Sweeney: So the energy increase in inflation was lower, you're also seeing that gasoline, so petrol prices were also lower and contributions from electricity also lower. So lots of inputs into inflation falling in price and therefore that lower inflation coming through.

[00:00:56] Sheldon MacDonald: Of course, that led to a lot of optimism. We saw a big rally. The S&P ended the week up 6%, the Nasdaq up over 8%, people really getting excited that perhaps this might mean the central bank doesn't need to raise as much or as high as had been predicted.

[00:01:14] Sheldon MacDonald: Now, just signing a little sound of warning here, this is what predicated the summer rally, people getting excited that maybe interest rates wouldn't have to go up that much.

[00:01:23] Sheldon MacDonald: So we are seeing essentially a replay of that now and as I say, you know, we've seen this before the summer rally ended with the Jackson Hole Symposium, the central bank's coordinated message of we're going to see the job through, we are going to keep raising rates until inflation is well and truly in check.

[00:01:41] Sheldon MacDonald: So perhaps a little bit of caution, but for the moment, as we said, positive signs, inflation has been falling now for quite some time. Now pivoting across to Europe, we have also seen gas prices falling quite sharply. Gas prices in Europe, now 70% below the peak levels that they reached. The oil price continues to fall slowly, so perhaps we'll see a continuation of this lower inflation trend in Europe this week as well.

[00:02:10] Sheldon MacDonald: We've also got UK inflation coming out this week. Obviously also a big point to note big pressure on the cost of living as we know and then there's the budget that will be out this week. Tax increases now have been well flagged.

[00:02:24] Sheldon MacDonald: Over the weekend we saw a number of the senior politicians indicating that we are all going to be paying more tax and that's really going to put a damp on spending perhaps over the Christmas season. Really just impacting the expectations on growth, and then finally, let's speak about politics, big news in the US this week was the midterm elections.

[00:02:45] Sheldon MacDonald: Nathan, your comments on those?

[00:02:47] Nathan Sweeney: Yeah, so in the US we obviously had the midterm elections. These elections happen two years after the president is elected and what we saw here was that we had no big red wave. So the red wave was the expectation that the Republicans would take control of the house and the Senate.

[00:03:04] Nathan Sweeney: That never materialized, and the Democrats have actually retained the Senate. So it looks likely that Joe Biden's Democratic Party will be able to continue to get new legislation passed in the US, so positive outcome from a Democrat perspective.

[00:03:20] Sheldon MacDonald: Yeah, so that outcome, not really market moving perhaps, almost more importantly is what's been going on in the background and really overshadowed by the elections.

[00:03:30] Sheldon MacDonald: This has gone unnoticed. Presidents, Biden and Xi, the US and China holding talks between themselves to really try and reset the relationship that they have. Relations have soured in recent years with trade wars and so on, and that resetting of relationships might lead to a more stable political situation. Of course news out of China, well, not news, but rumors that they are potentially looking at easing the covid restrictions there, which again might be just the thing that they need to reinvigorate their economic growth.

[00:04:04] Sheldon MacDonald: Certainly expectations of a growth there, as with everywhere else in the world have been coming down.

[00:04:10] Sheldon MacDonald: Of course, the other big news last week was the collapse of the FTX Crypto Exchange.

[00:04:15] Nathan Sweeney: Yes. We had some interesting developments in cryptocurrency markets last week. FTX, which is an unlisted company and one of the world's biggest crypto exchanges, so a place where investors can buy and sell cryptocurrency collapsed after concerns about its financial health.

[00:04:36] Nathan Sweeney: Now it remains to be seen what the impact will be on wider markets because many of the companies that operate in this space are unlisted and that's good news because it means that there's likely to be less impact on main markets.

[00:04:51] Nathan Sweeney: However, we'll monitor the situation closely and provide any necessary updates.

[00:04:57] Sheldon MacDonald: Anyway, it's been a busy week last week, as always in markets. The tone this week and last week have been fairly positive, and we hope for that to continue. We look forward to speaking to you again next week.