Monday Espresso Podcast 17th October 2022

[00:00:00] Sheldon MacDonald: It is the 17th of October today. Now not to jinx anything, but this week, Wednesday actually, we'll see the 35th anniversary of the 1987 crash.

[00:00:10] Sheldon MacDonald: Now, not suggesting that we're expecting any sort of crash this week, however, markets have been volatile, as we know in the last couple of weeks, couple of months, really.

[00:00:19] Sheldon MacDonald: Last week in particular was a volatile week, case in point, we did see on Thursday, I think it was, the S&P initially down two and a half percent, and then ended the day up over two and a half percent.

[00:00:31] Sheldon MacDonald: So volatility really still present with us in the market. What was it that led that volatility on that day, Nathan?

[00:00:37] Nathan Sweeney: Yeah, so markets are definitely on tenterhooks at the moment, and it was actually the inflation print, which came out on Thursday.

[00:00:44] Nathan Sweeney: So if we look at the headline number, you saw that inflation came in at 8.2% and the market looked at that number and then reacted because the expectation is that inflation should be falling and that number coming in a little bit higher than expected but if you filter into the numbers a little bit, what you can see is that inflation has been trending down.

[00:01:06] Nathan Sweeney: So we had that high of about 9.1% and now we're at 8.2% but it was the core reading that came in a little bit higher than expected as well, and people latching onto that number and again, those concerns about inflation but there's a really interesting point here.

[00:01:22] Nathan Sweeney: If you look at the core inflation, the biggest driver of that is shelter or housing and it equates to about 40% of that data, and a lot of those housing figures had been rising earlier in the year leading into the inflation prints that we're seeing today but the reality is, with higher interest rates, higher mortgage costs, housing data has been rolling.

[00:01:46] Nathan Sweeney: So the expectation here is that these inflation triggers will continue to fall. So you could see why you had that kneejerk reaction on the initial data, and then when the market digest the numbers, you can see obviously that the positive number coming through there last Thursday. So a big turnaround in the equity market.

[00:02:02] Sheldon MacDonald: Closer to home, another reason for volatility here obviously has been the political situation. All the shenanigans going on, so far in reaction to the news last week of the new Chancellor being appointed and the initial steps that he's taken, so far sterling has slightly strengthened and the guilts markets stabilized a little bit, although that guilt stability, perhaps something to do with the support that was being provided by the Treasury and the Bank of England.

[00:02:27] Nathan Sweeney: Yeah, so the Bank of England had to step in because obviously the government put through a number of tax cuts, which the market wasn't happy with, and that created a lot of volatility within bond markets.

[00:02:37] Nathan Sweeney: So they had a package of £65 billion. So looking to purchase £65 billion of gilts and index link gilts over the course of a two-week period, and that ended on Friday. The reason they didn't extend that program was because they didn't get a lot of take up. So in total, they had to purchase £19.2 billion, but they had an allowance, as I mentioned, for £65.

[00:03:00] Nathan Sweeney: So because the appetite wasn't there, they cut that program in line with expectations.

[00:03:05] Sheldon MacDonald: Yeah, markets really saying that they didn't actually need all of that support, really, as I said, just a sign of that stability perhaps returning in that space. On the political front, again, further afield this time, China this week sees the National Congress.

[00:03:20] Sheldon MacDonald: President Xi expected to be nominated for a, a third term in office. The backdrop to that though is obviously the weaker economic picture in China.

[00:03:30] Nathan Sweeney: Yeah, so if we look at China specifically, they have taken a very tough stance on Covid. So they have a zero Covid policy in place, and this is likely to have a big impact on their economic growth.

[00:03:43] Nathan Sweeney: So growth has definitely been weaker in China, and we expect those figures to continue to show weakness in the face of zero Covid restrictions, which are going to impact your economic activity and ultimately your GDP growth.

[00:03:57] Sheldon MacDonald: Now last week saw the start of earning season in the US. Only a couple of companies have reported so far, but so far indications are that earnings are in line with expectations.

[00:04:07] Sheldon MacDonald: Remember, earnings expectations have been coming down slightly. Not significantly, though they're only down about 5% since the middle of the year. This week though, see some of the big heavyweights reporting. Any expectations for anything on that front. Nathan?

[00:04:22] Nathan Sweeney: Yeah, so for Q3 earnings, we're expecting companies to deliver about two and a half percent of earnings growth, but we do have, as you mentioned, some of the big names out this week.

[00:04:31] Nathan Sweeney: So Tesla will be a good example of that. That'll give you a good indication of how the consumer is thinking. So are they still spending money looking to buy cars? Netflix is another. So they had disappointing earnings at the beginning of the year as people cut subscriptions in the face of higher inflation.

[00:04:47] Nathan Sweeney: Are we seeing a reversal in that trend? I know they did release a new package, which was around having a cheaper model where there was advertising included, so again, we'll see how the market is reacting to that.

[00:04:58] Nathan Sweeney: We also have Goldman Sachs and IBM, so lots of companies reporting. We get a clearer picture on what's happening in the economy as these companies tell us how they're weathering the inflation storm.

[00:05:09] Sheldon MacDonald: And that's for this quarter's earnings, so far earnings expectations for 2023, not really coming down, markets really at the moment not fully expecting any kind of earnings recession for next year, an economic recession, notwithstanding. And then finally, looking ahead this week, we've got inflation figures coming out here in the UK and in Japan.

[00:05:29] Nathan Sweeney: Yeah. And the market will focus on those intently because inflation has been a hot topic.

[00:05:34] Sheldon MacDonald: Yep. We have seen the oil price coming down this past week, although the previous week it had risen on the back of those OPEC cuts, but hopefully, the trend continues lower and we can see inflation start to ease off further.

[00:05:48] Sheldon MacDonald: Anyway, a busy week, as always, an exciting week ahead and we look forward to speaking to again next week. Thank you.