Monday Espresso Podcast 15th August 2022

[00:00:00] Sheldon MacDonald: It is the 15th of August today. We had another good week in markets last week, at least in equity markets. In the US it was the fourth straight week of gains.

[00:00:10] Sheldon MacDonald: Now in the US, in particular, in focus was the inflation figure that came out better than expected and also consumer confidence rising for another month, also better than expected and that's leading investors to start thinking that perhaps in September, we might only get a 50 basis points rate hike. So that taken positively by the market.

[00:00:29] Sheldon MacDonald: On the other hand though there are some signals, some indications that maybe things aren't quite as good as they seem, Nathan.

[00:00:35] Nathan Sweeney: Yeah. So I think, well, let's take a look at inflation first.

[00:00:39] Nathan Sweeney: So inflation data definitely took a step in the right direction. So the move lower was driven by commodities and energy prices.

[00:00:46] Nathan Sweeney: So that helped to alleviate some of the inflation pressure that we've seen recently.

[00:00:51] Nathan Sweeney: So in July, if you look at the average petrol price. Petrol prices fell by about 8%, so that contributed to lower inflation and then you've also seen that oil was down about 11% over the month of June and again, feeding through to lower inflation.

[00:01:06] Nathan Sweeney: So the numbers were expected, but they were better than expected. So inflation coming in at 8.5% instead of 8.7% expected and coming off that record high that 40 year high of 9.1%.

[00:01:21] Nathan Sweeney: Now that's a good reason to be optimistic.

[00:01:24] Nathan Sweeney: However, let's take a look at company earnings because company earnings have just wrapped up in the US. So if we look at energy companies, they have been a massive contributor to earnings over the quarter. So if we look at the energy sector, it was the best sector in terms of contribution.

[00:01:42] Nathan Sweeney: It contributed 299% and no that is not an error. 299%.

[00:01:49] Nathan Sweeney: So energy companies growing their earnings by 299% over the last year and actually growing their earnings on average by $47.7 billion, which is actually higher than the average of all the other US companies, which grew their earnings on average by $31.1 billion.

[00:02:07] Nathan Sweeney: So the point here is that the data is skewed by the fact that energy companies had this bumper earnings and, you know, so it does matter and it does mean that if you exclude energy, the S&P would report a decline in earnings of 3.7%. Versus an increase of 6.7%.

[00:02:27] Nathan Sweeney: So the devil is in the detail.

[00:02:29] Sheldon MacDonald: Yeah. So as you say, the oil company is putting a positive veneer on that overall number, which looks positive, but when you dig into it, not so great.

[00:02:37] Sheldon MacDonald: The bond market also taking a pessimistic view on the economy, going forward, the yield curve in the US still deeply inverted, 10 year bonds having a yield now, 40 basis points or more below the yield of the two year.

[00:02:52] Sheldon MacDonald: Now, typically an inverted yield curve, definitely a sign, in the past at least, of a recession to come some pessimistic interpretations on that front.

[00:03:01] Sheldon MacDonald: Now, speaking of economic growth, we did see the UK GDP number of last week.

[00:03:06] Sheldon MacDonald: It was negative for Q2, but slightly better than feared. The negative north 0.6%. As I say slightly better than, than had been feared.

[00:03:15] Sheldon MacDonald: The question marks over what it means for Q3 though, and that would be what some people say is the definition of recession, would be two consecutive quarters of negative growth.

[00:03:25] Sheldon MacDonald: But still, as I say, question marks for Q3. Will there be a rebound in July after a negative June, where we had the Jubilee celebrations and so on, which caused the June number to be more negative than had been expected. So less clear about what goes on in Q3.

[00:03:41] Sheldon MacDonald: Most economists, still calling for a positive result in Q3.

[00:03:46] Sheldon MacDonald: Now, speaking of recession, the region that's been most expected to fall into recession, is that in Europe. Obviously they've had the supply issues, issues around the war in Ukraine and also issues about getting gas and oil supplies.

[00:04:00] Sheldon MacDonald: We've already started hearing news about rationing and so on. The latest issue to face Europe is the potential drought and water levels on the Rhine, which is a key route for many of the manufactured goods to pass through.

[00:04:15] Sheldon MacDonald: Now there, we are hearing that a place called Kaub on the Rhine slightly west of Frankfurt is one of the key way points along the route, water levels there just 40 centimeters.

[00:04:26] Sheldon MacDonald: Now some of the barges can get through at that level, but if it falls anymore, definitely going to cause problems and lead to a negative or further negative outcome on European GDP.

[00:04:38] Sheldon MacDonald: So some difficult pictures, some difficult figures there and numbers to deal with but perhaps easing things, maybe we'll get some rain this week.

[00:04:47] Nathan Sweeney: Yeah. I think people will be very much looking forward to some rain after the recent hot weather that we've had.

[00:04:52] Sheldon MacDonald: Yep and speaking of that, what else have we got to look forward to this week.

[00:04:56] Nathan Sweeney: In the US, the central bank will be releasing their minutes.

[00:04:58] Nathan Sweeney: So this will give us some insight into the central banker's thoughts on inflation and what next we also get retail sales. So how's the retailer thinking about all of this, and we also get housing data. So will mortgages be impacted by the higher rates that we're seeing.

[00:05:13] Nathan Sweeney: Elsewhere investors will pay close attention to inflation figures coming out in the UK and Japan and we also get unemployment data in the UK plus growth figures, Q2 growth figures coming out of Japan. So we're a busy week.

[00:05:26] Sheldon MacDonald: Lots to look forward to coming out this week. Lots to get your heads around. Thank you for joining us. And we look forward to speaking to you next week.

[00:05:32] Nathan Sweeney: Thank you.