Monday Espresso Podcast - 19th June 2023

[00:00:00] Sheldon MacDonald: It is the 19th of June today, focusing this week on different policies from different central banks around the world. So we had a fairly large number of central banks meeting last week. Let's start with the European Central Bank. They raised rates by 0.25%. Pretty much as expected, but with a hawkish tone indicating that we're gonna get some further rate hikes in the weeks and months ahead.

[00:00:27] Sheldon MacDonald: Moving on to the Fed, the Fed left rates unchanged, and that was also pretty much as expected. Markets were pretty strong on the back of that, the equity market in particular, choosing to focus on the fact that there had been no hike. And then in China we saw rates coming down. What we've been seeing in China in the last couple of weeks is lower growth than expected and in counter to that the authorities there in China really starting to push some stimulus measures through, and the expectations of that stimulus leading the Chinese market to a pretty strong rally up between 3% to 5%, depending whether you're looking at the onshore market or the offshore market.

[00:01:06] Sheldon MacDonald: So some strong reaction from the equity markets on the back of all that news. As I say, equity markets really focusing on the fact that they see a soft landing scenario, so less and less likelihood of a recession. Now, we saw some of that reflected in the data this week in the UK. Raj?

[00:01:27] Raj Manon: We did and one thing that certainly surprised is that the consumer has been stronger than expected.

[00:01:34] Raj Manon: That's led to an economy running hotter than expected. So starting with GDP, we had figures out last week that showed a rebound from the March figures. The March figures showing a 0.2% decline. The April figures showed a 0.3% increase. The leading contributor was the services sector, which grew 0.3% in the UK.

[00:01:59] Raj Manon: The service sector being one of the largest sectors, making up over two thirds of the UK economy. We also had signs of strength in the labour market with the unemployment rate remaining low at 3.8% and not increasing as much as expected.

[00:02:17] Raj Manon: In addition, there was also a surprise to the upside with the annual wage inflation figures that came out last week with annual wages increasing 7.2%. This has all led to a reappraisal of the path for interest rates with the terminal rate expected to be 6% for interest rates by the year end.

[00:02:38] Sheldon MacDonald: So strength in the economy here in the UK against that in the US again, obviously the biggest market around, so we keep speaking about it. US market also pretty strong last week despite the hawkish rhetoric by the central bank there, the dot plots of the bankers showing that they expecting another two rate hikes of about 0.25% each before the end of the year.

[00:03:02] Sheldon MacDonald: Equity markets though, choosing to focus on the fact that inflation in the US continues to fall. Inflation there now around about 4%, and that's a two-year low and also they saw in the US slightly higher jobless claims, so indicating perhaps some weakness ahead in the jobs market, which has been one of the drivers of the inflation higher for longer narrative.

[00:03:24] Sheldon MacDonald: Now I spoke about different policies around the world from central banks. We also had different reactions from the different markets. So equity markets strong, focusing on the economic growth aspects, but we saw bond markets a bit weaker last week, focusing on the hawkish aspects. So in the UK, the accelerating wage trends that Raj spoke about, and also the fact that we are expected to get to those higher rates by year-end.

[00:03:52] Sheldon MacDonald: Now we do have, of course, the central bank meeting this week, right?

[00:03:57] Raj Manon: We do, the Bank of England meets on Thursday to set interest rates, and the expectation at the moment is for a quarter percent increase to 4.75%.

[00:04:08] Sheldon MacDonald: And as you mentioned earlier, that terminal rate the highest expected rate, now pushing up to round about 6% by year-end.

[00:04:16] Sheldon MacDonald: Of course that's creating a lot of concerns around what it might do in the mortgage market. We've been reading in the papers a lot of scary stories about how much more mortgage holders are going to have to pay, and of course, that though will translate into a weakening trend perhaps on the economy in counterpoint to those points that you made earlier.

[00:04:34] Sheldon MacDonald: So lots to keep us interested, and we look forward to speaking to you again next week.