Monday Espresso Podcast - 15th May 2023

[00:00:00] Sheldon MacDonald: It is the 15th of May today. Last week we saw markets slightly weaker, pretty much marking time we think.

[00:00:07] Sheldon MacDonald: There was a bunch of economic data that's come out or sentiment indicators indicating weaker times ahead of us, so we saw commodities falling. We had the oil price down. Again, that's in anticipation of weaker growth ahead.

[00:00:21] Sheldon MacDonald: We had geopolitical news, some tensions running in China, with US and European companies threatening further sanctions on companies in China that are helping Russia's military.

[00:00:33] Sheldon MacDonald: We've got the impetus out of China weakening, remember we spoke about it earlier in the year about the, the rebound from Covid that we saw globally, we expected a, a strong rebound from China. That hasn't been as strong as expected, and that's starting to fade now.

[00:00:51] Sheldon MacDonald: We've also got consumer sentiment out of the US last week that
showed a negative trend. And finally on the rates front, we had further interest rate hikes. We'll speak about those in a second, but the expectation is that the maximum headwinds from all the interest rate hikes that we've seen are yet to come.

[00:01:09] Sheldon MacDonald: So with all of those on the negative side of the ledger, Market's still really holding their own.

[00:01:14] Sheldon MacDonald: Nathan, what's on the positive side of the ledger?

[00:01:17] Nathan Sweeney: Yeah, so Sheldon, you know me, glass half full as always.

[00:01:21] Nathan Sweeney: So I do think there's a lot to be positive about. If I just take a little step back first, and I think about last year specifically, you had concerns about three things really.

[00:01:31] Nathan Sweeney: Economic growth, inflation and interest rates of Fed policy or Central Bank policy.

[00:01:37] Nathan Sweeney: So what we're seeing is economic growth is expected to deteriorate, however, what you're seeing is that a lot of countries are now expecting their growth to be more resilient this year than they thought it was going to be.

[00:01:51] Nathan Sweeney: A good example would be the Bank of England. They did raise rates last week, but they also came out and said, we think growth is actually gonna be okay, and we don't think we're gonna have a recession this year. So that to me is quite a positive.

[00:02:04] Nathan Sweeney: Then on the inflation front, obviously we have lots of inflation data coming out from different regions.

[00:02:10] Nathan Sweeney: We did have US inflation last week, inflation continues to fall there. It's at 4.9%. So we're actually seeing disinflation now. So inflation numbers are coming down and interestingly, you tend to see that inflation follows a symmetrical path.

[00:02:27] Nathan Sweeney: So what that means is the pace that it goes up, when it's going up, it tends to fall at the same pace and over the same time period.

[00:02:34] Nathan Sweeney: So we're starting to see that bell curve coming through with inflation, so we do expect that to come down and then with regards to central banks, we had the Bank of England, they were increasing interest rates last week, but we all know that central banks are closer to the end of that cycle.

[00:02:50] Nathan Sweeney: So in the US as an example, they've likely completed their tightening cycle, Bank of England is pretty much there. It will depend on the inflation numbers, and we can come onto that in a second, but to me there's a lot to be positive about or optimistic about.Shel

[00:03:05] Sheldon MacDonald: So we haven't spoke about company earnings for a little while. We've pretty much finished the Q1 earnings cycle now, just about all companies have reported.

[00:03:14] Sheldon MacDonald: Now earnings four Q1 have come in negative. So on average a minus 3% growth rate on earnings. That though is actually seen as a positive because the consensus expectation was for minus 7%, and perhaps positive in there as well is the fact that profit margins in companies are still strong. So companies have been able to resist all the, these headwinds that I mentioned from all the rate hikes that we've seen so far, so perhaps some positives there.

[00:03:44] Sheldon MacDonald: The other positive is that we are still pricing in rate cuts. The market is still expecting rates to come down towards the end of the year, so still a strong picture on that front.

[00:03:54] Sheldon MacDonald: One thing I also wanted to mention though is that although markets have been relatively steady in the last couple of weeks, that masks some of the movement that's happening under the surface.

[00:04:04] Sheldon MacDonald: What's happened so far this year is that we've had a strong rebound from those tech stocks. The Facebook's, Amazon's Apples, Microsoft, Google, they're up on average about 30% year to date.

[00:04:16] Sheldon MacDonald: They've driven about 98% of the S&P growth so far. Now, why isn't the S&P up further if those stocks that I mentioned are up 30%?

[00:04:25] Sheldon MacDonald: That's because we've got weakness in some of the underlying stocks. In particular, some of the banking stocks still pretty fragile after the regional banking crisis that we've seen that we're kind of still in the middle of. So a difficult picture at the moment and perhaps still set up for further volatility ahead as the market moves between expectations of higher and lower growth.

[00:04:46] Sheldon MacDonald: Let's look at the week ahead, Nathan. What's coming up this week to keep our minds busy?

[00:04:51] Nathan Sweeney: Absolutely. Let's take a look at what we've got on the scores for this week.

[00:04:54] Nathan Sweeney: We've got UK unemployment, so the number there is expected to come in around 3.8%.

[00:05:01] Nathan Sweeney: We've also got Q1 GDP figures for Europe, so we get a view on growth coming out of the Eurozone.

[00:05:08] Nathan Sweeney: We've got retail sales data, industrial production data and housing indicators coming out in the US so that'll give us a good feel for what's happening in the economy there, so lots for the market to focus on for this week.

[00:05:20] Sheldon MacDonald: We look forward to speaking to you again next week. Thank you.