Monday Espresso Podcast 16th January

[00:00:00] Sheldon MacDonald: It is the 16th of January today. Blue Monday supposedly, but to take the edge off that, we've had some pretty positive news in markets, strong start of the year, good start last week or another good week last week, mainly on the equity side, but bonds also delivering some decent returns.

[00:00:17] Sheldon MacDonald: That strong market last week, Nathan mainly driven perhaps by the evolving view on rates and inflation, especially out of the US.

[00:00:26] Nathan Sweeney: Yeah, so if we think about inflation, it's obviously been the key thing that everybody's been focused on last year and what we're starting to see now is a trend develop and that trend is positive because it's actually inflation coming down.

[00:00:39] Nathan Sweeney: So if we look at the US specifically, we know that inflation peaked in the US at 9.1%, and the latest rating came in at 6.5%. So it's been trending steadily, downwards since the middle of last year and markets like that because ultimately that means that central banks won't have to increase interest rates as much.

[00:01:00] Sheldon MacDonald: Yeah, we're certainly starting to get a change in expectations that perhaps the terminal rate that we see, the peak level of interest rates might not be as high as had previously been expected. The Fed on the other hand, still playing the narrative that inflation is persistent and they need to stay on top of it.

[00:01:18] Sheldon MacDonald: Of course you'd expect the Fed to say that they can't allow expectations to get hold that will allow inflation to persist at the higher levels. So certainly the Fed still talking tough, but as I say, the market view started to come around to the sense that perhaps interest rate hikes might not go on for as long as feared.

[00:01:39] Sheldon MacDonald: Now of course, that then brings us around to a view that perhaps there may be a soft landing in store for the US market in particular, or the US economy at least and we've got Goldman Sachs for instance, coming out and saying, actually they see no recession anywhere next year.
[00:01:54] Nathan Sweeney: Yeah, so quite interesting there.

[00:01:56] Nathan Sweeney: So if you look at the data coming out from Goldman Sachs, they released some research over the weekend and basically they've come out and said that they don't think that any major economy will go into recession this year. Now, if we take a step back to last year, we saw all these charts circling, showing that everybody was expecting a recession.

[00:02:15] Nathan Sweeney: So it was the highest expectation for a recession going back to 1968. So basically everybody has this recession nailed on.

[00:02:23] Nathan Sweeney: Why? Because if you increase interest rates, it increases financing and obviously the cost burden for lots of people and companies, and therefore that reduces growth, but what we're seeing now is inflation falling, which means less interest rate rises, so therefore less of a drag on the economy.

[00:02:45] Nathan Sweeney: And the other positive is obviously the fact that we've had such a mild winter, everybody was expecting these big gas bills to come through, which will be a drag on consumer spending, and that hasn't happened either. So people are now thinking that actually is this recession that we are all expecting to happen, going to happen.

[00:03:05] Nathan Sweeney: The market doesn't think so, and that's why you've had two strong back to back weeks in equity markets.

[00:03:12] Sheldon MacDonald: Of course we have had the oil price this past week, rebounded previously it had gone down, but up 8% last week and that's on the back of expectations of higher demand, both on this higher growth outlook and also on the China rebound story that we've spoken about.

[00:03:29] Sheldon MacDonald: Closer to home, we've got UK GDP figures that came out and confounding everyone, the UK GDP in November was actually positive. Now some short-term drivers there, the World Cup created a positive impetus there, but also a rebound from September where the bank holiday, in light of the queen's funeral, took the gloss off markets.

[00:03:50] Sheldon MacDonald: So interesting point at the moment for the UK. In the meantime though, some retailers have come out and said, actually trading was pretty good over the December season. We had Next coming out. They lost about a third of their value last year, but they bounced up 10% last week. We've seen a couple of the other retailers as well, saying that actually things over the Christmas season weren't so bad.

[00:04:13] Sheldon MacDonald: We will see this week official retail sales data coming out, and that might then give us a steer. Otherwise on the week ahead. Nathan, what have we got?

[00:04:22] Nathan Sweeney: Yeah, so the big focus I think is going to be company earnings. So if we think about, last year was all about inflation. This year's question marks about recession.

[00:04:31] Nathan Sweeney: What will tell us if a recession is coming, how companies are trading in this environment. So what has been the impact of higher costs on companies profits, inflation on companies, profit and we'll see that come through as companies report their earnings for Q4. So this week we've got Goldman Sachs, we've got Morgan Stanley, we've got Netflix, and everybody will be focused on the outlook.

[00:04:52] Nathan Sweeney: So how do these companies expect to do, or how do they expect to trade for the remainder of 2023? And that will be the market's focus, because that will tell us if we're going into recession or not.

[00:05:05] Sheldon MacDonald: On the macroeconomic front, we've also got, back here in the UK, I mentioned retail sales coming out this week.

[00:05:10] Sheldon MacDonald: We've also got inflation and employment numbers coming out, so certainly a lot to look out for here on the UK front, ECB minutes from their past meeting. Those will be published during the course of this week, and we'll also see some data on Chinese growth. Let's hope for another positive week. It's certainly been an interesting start to the year.

[00:05:30] Sheldon MacDonald: We look forward to speaking to you again next week.