Monday Espresso Podcast 19th December 2022

[00:00:00] Sheldon MacDonald: It is the 19th of December today. This is the final 'Espresso Podcast' for the year and we end the year pretty much the way we started with a focus on inflation. Inflation figures last week, pretty much across the board coming in lower than expected and lower than the previous month and that really paved the way for central banks to do what they had said they were gonna do, which is to ease the pace of their rate hikes.

[00:00:28] Sheldon MacDonald: Got Raj on the line this morning. Raj take us through what happened in the UK.

[00:00:33] Raj Manon: Yes, and as you've just outlined, that's certainly what we saw in the UK. Inflation fell more than expected to 10.7% last month, and that was after reaching a 41 year high of 11.1% the month before, this suggested, we may have actually seen that peak in inflation we've been talking about throughout the course of this year.

[00:00:56] Raj Manon: The Bank of England certainly thought so. They reduced the size of their interest rate increases from the previous 0.75% to a half a percent this time. So reducing the rate that they're increasing interest rates, and this was certainly seen as a dovish rate hike as two of the voting members actually voted for no hike at all.

[00:01:22] Raj Manon: So with inflation looking like it might have peaked in the UK and that dovish tone set by the Bank of England, the market started to reassess what they think terminal rates will be for next year, and that was to a lower level. This led to a reversal in the pound, which had been on an upward path against a dollar and almost weakened 1.8% on the day.

[00:01:48] Sheldon MacDonald: Similarly, in the US as you mentioned in the inflation numbers, the US, their reading there was 7.1% and that's the lowest that they've seen since December 21. In the US, that decline in inflation has been going on now since pretty much the middle of summer.

[00:02:03] Sheldon MacDonald: We also had the Central Bank of Europe raising rates and here the tone though was, was much more hawkish, even though they only increased by 0.5%, Christine Lagarde reiterating the fact that they're really going to stay the course, they're going to keep rate hikes on the table until inflation is well and truly under control.

[00:02:24] Sheldon MacDonald: With the slower pace of inflation, though market attention turned to recession and the higher risk of recession, creating an environment in which bonds started to do well and equities weakened.

[00:02:36] Sheldon MacDonald: So we did have a weaker picture on the equity front last week and a stronger picture on the bond side. Now that recession fears really coming from a couple of things. Firstly, retail sales were weaker both in the US and in the UK. Raj?

[00:02:53] Raj Manon: Yeah, and retail sales really is so important for the economy, consumer spending accounting for around two thirds of national output, so really key for growth.

[00:03:03] Raj Manon: In November, retail sales continue to be weak, falling 0.4%. So shoppers are telling us that they're holding off their Christmas spending until December, which is later than what we've seen in previous years. So the real test really will be how the retail sector performs this month.

[00:03:23] Sheldon MacDonald: Yes, and we'll see the final revision of UK GDP out this week. That'll be Q3 GDP. The indication though, was that October was a a pretty weak month. Raj, you wanna jump in there?

[00:03:36] Raj Manon: Yes, so GDP actually rose in the month from September to October, rising 0.5%, but this number was not as positive as it first seemed because there was some distortion in the numbers, due to that extra bank holiday we saw the previous month for the Queen's funeral.

[00:03:54] Sheldon MacDonald: Right, so touch and go perhaps whether Q4 will be positive or negative. Of course, having had a negative Q3, if we do get a negative Q4, that's two consecutive quarters and meeting the technical definition of a recession. On the other side of the world, China is also going to impact the outlook for a recession or not.

[00:04:15] Sheldon MacDonald: So an easing of covid restrictions there initially seen as positive. But of course there will be the inevitable covid wave that will hit China and in fact, Chinese officials talking about expecting three covid waves and that itself will, will impact output and demand.

[00:04:32] Sheldon MacDonald: And then finally, as you mentioned, rates, if they do stay higher for longer, that obviously will also impact the outlook for recession as we've been speaking about for several months now.

[00:04:43] Sheldon MacDonald: As I mentioned at the start, this is the last of these podcasts for the year. We are taking a break next week. We hope that you'll also be taking a break. We hope that you enjoy the holiday season, and we look forward to speaking to you again next year.