Monday Espresso Podcast - 17th April 2023

[00:00:00] Sheldon MacDonald: It is the 17th of April today, we had a stronger undertone to markets last week, especially on the equity side, with investors once again turning the focus to the prospects for a soft landing.

[00:00:12] Nathan Sweeney: Yeah, well actually, if we look at equity markets, we've seen some really good returns so far this year.

[00:00:17] Nathan Sweeney: So let's start with the UK for the week, UK markets were up 1.7% for the week and are actually up close to 7% year to date, but if you look at Europe, it was up 2.6% last week, and it's actually up just over 15%.

[00:00:31] Nathan Sweeney: So some really good returns coming in there, for markets, despite all of the negative headlines.

[00:00:37] Sheldon MacDonald: And as we say, some negative headlines last week, we did see retail sales numbers out of the US, those are slightly worse than expected, partly because of the tax situation.

[00:00:47] Nathan Sweeney: Yeah, so what happens in the US is that you get a tax rebate, so you have to fill out your tax return, it's a very complicated system, and generally a lot of people end up getting tax back, so they get a tax return.

[00:01:00] Nathan Sweeney: As a result of that, you know that money can be spent but if you look at the number that was received this year, it was lower than last year, and obviously people are still concerned about the cost of living crisis inflation and therefore are retrenching slightly and putting some of that money away, so sticking it in the bank instead of spending it.

[00:01:18] Sheldon MacDonald: So retail sales not quite as positive as expected last week, the good news though, was inflation. Inflation still continuing its steady decline.

[00:01:28] Nathan Sweeney: Yeah, so we're actually seeing some real positive news on the inflation front. So if you remember in the middle of last year, this is US inflation we're talking about, US Inflation was 9.1%, it's actually fallen into 5%, and there was a lot of concerns about stickier inflation, some good prices and services prices weren't coming down as quickly.

[00:01:48] Nathan Sweeney: You're starting to see that stickier inflation, so some of those good prices are starting to roll, and that's really positive. So the expectation is inflation will still come down at the pace it's been coming down so quite quickly, and that has to be good news for markets, has to be good news for retail customers as well if those prices continue to come down.

[00:02:09] Sheldon MacDonald: One of the big positives that we took out of that inflation data last week was how the labour market, especially in the US, has restructured, it's less of a concern than it was before. We've seen the jobs to workers ratio declining and wage growth, really starting to ease back towards a level where, in particular the Fed might be a bit more comfortable with it.

[00:02:30] Sheldon MacDonald: We're not out of the woods yet though, so we did have a close to a banking crisis late in March, and on the back of that, we might see tighter lending standards imposed by the banks, and that might curb growth a little bit.

[00:02:44] Sheldon MacDonald: Best estimates seem to be that that might knock off about 0.4% of gdp. So soft landing, yes, but still some things to be concerned about, but really some positives there.

[00:02:56] Sheldon MacDonald: As we've mentioned, on the labour market front, housing stabilisation, so house prices seem to be steadying, Nathan mentioned some of the contributors to inflation coming down, one of those is shelter, so rents aren't going up as much as they did last year. So quite a lot of things to be positive about in terms of stabilisation.

[00:03:17] Sheldon MacDonald: Now the other thing that we like to focus on is earnings, and last week saw the kick-off of the Q1 earnings season in the US, some good news there, Nathan.

[00:03:27] Nathan Sweeney: Yeah, so you talked about the banks there, so obviously a big focus on the banks because we've had that collapse of SVB Bank and a lot of concerns, would there be spillover, ensue other banks, would that impact the earnings? And the answer to that thus far is no. So we had four of the big banks report last week, and their earnings were much better than expected. So this was a positive surprise for the street or investors, and they received that news pretty well, and that helped the markets to move up last week.

[00:03:55] Nathan Sweeney: So what we'll have now is the rest of the companies in the S&P 500 are going to report their earnings over the course of the next couple of weeks. Now, the expectation is that those company earnings will be down about 6.5% when you compare them to last year or this quarter last year. But the reality is, is that these companies like to deliver a positive surprise.

[00:04:20] Nathan Sweeney: So sometimes the earnings aren't what they're expected to be, they're generally better.

[00:04:26] Sheldon MacDonald: So companies really have guided analysts to reduce their earnings forecasts, thus leading to the potential then for positive surprises.

[00:04:34] Nathan Sweeney: And the interesting fact is actually that earnings tend to surprise by about 5% on average, so investors will be watching out to see what that looks like.

[00:04:43] Nathan Sweeney: We'll get a lot more clarity on that this week as we've got some big name companies reporting. Some of those include the likes of Bank of America, Johnson and Johnson, Goldman Sachs, Netflix, IBM, and American Express.

[00:04:56] Nathan Sweeney: So what you'll see is that the market is very much focused on that this week and the other thing this week that people will be looking at is inflation data in the UK.

[00:05:05] Nathan Sweeney: So we've seen inflation data coming down. Will it continue to come down? We'll have to wait and see.

[00:05:10] Sheldon MacDonald: Lots to look forward to. As always, we speak here again next week. Thank you.