Monday Espresso Podcast - 20th February 2023

[00:00:00] Sheldon MacDonald: It is the 20th of February today, a mixed week in markets last week with equities mixed, stronger in the UK and in some developed markets, but the US slightly weaker and then bond markets also slightly weaker.

[00:00:13] Sheldon MacDonald: Now it feels like this is all we've been speaking about for the last year or so, but it's another week where really the focus is on inflation versus growth. Nathan?

[00:00:22] Nathan Sweeney: Yeah. So the real thing here is that we have a strong economy. We had big concerns about recession and that really hasn't materialized. So last week we had retail sales figures out, in the US, and these are the best retail sales figures we've had in over two years and it just shows you that this reopening demand that we have post covid is really driving growth, and that's obviously conflicting with inflation and central banks raising interest rates to try and bring down inflation.

[00:00:53] Nathan Sweeney: So the economy remains strong and defies those rate rises, which obviously has the market concerned about the potential for inflation to reassert itself, and that's why you're getting kind of mixed signals within markets over the last week.

[00:01:08] Sheldon MacDonald: Of course, we have seen these massive rate rises last year, but everyone's saying, look, you know, these rate rises they operate with a lag and we haven't seen the effects yet, as you say, the economy's still staying pretty strong.

[00:01:19] Sheldon MacDonald: We did get inflation readings last week, so the US inflation number does continue to trend down, but it didn't fall by as much as was expected. In the UK, we saw inflation down slightly more than expected, but in both cases in the UK and the US there's reasons why people are getting a little bit concerned.

[00:01:38] Sheldon MacDonald: In the UK it's because the wage print, wage bills, rose by more than expected, and inflation stays low, so that's the strength of the jobs market, we've highlighted that a few times, especially in the US as well, and so this view that interest rates may have to stay higher for longer, or indeed go up even further is starting to come around again.

[00:01:57] Sheldon MacDonald: We were getting, you know, markets were getting quite excited that perhaps we'd see rate cuts this year even, those expectations now pushed out to 2024. So some concerns on that, and that's then leading to a little bit of weakness, especially as I say in the US market last week.

[00:02:15] Sheldon MacDonald: As yet no equity outflows so far, so portfolio managers in the whole staying relatively bullish but just some causes for concern.

[00:02:26] Sheldon MacDonald: Now, of course, another reason, is the strength of the boost that we might get from China. And we saw some moves in China last week.

[00:02:34] Nathan Sweeney: Yeah, so the Chinese banker, the People's Bank of China, so they injected a further 199 billion into the fiscal system or the money system.

[00:02:45] Nathan Sweeney: So what's happening there, essentially you have had Covid restrictions in place for three years, they've been lifted, the economy's reopening, there's a huge demand now for loans and the People's Bank of China basically is just funding money into the system to ensure that they can obviously cater for that increased appetite and that should lead to further growth in China.

[00:03:08] Nathan Sweeney: So I think the prospects in that part of the world are still quite good and you should see a spillover into other areas, which does mean that obviously growth is likely to be better than expected.

[00:03:19] Sheldon MacDonald: Yes, as you say, that boost that we get from China reverberating around the world, looking at the week ahead, going back to our inflation theme, we do get the minutes from the latest Fed meeting to be published during the course of this week, and that might serve to highlight where the Fed's own concerns lie.

[00:03:38] Sheldon MacDonald: What are they worried about? How are they thinking about this inflation versus growth story? And the other important thing that we're going to get is the PMI reading.

[00:03:47] Nathan Sweeney: Yeah, the purchasing manager index, so basically PMI, what is that? So it essentially gives you an idea of whether the service or manufacturing sector is contracting or growing.

[00:04:00] Nathan Sweeney: It's just a survey of managers in the service or manufacturing sector, and basically are they buying more stuff, purchasing more stuff, or are they purchasing less?

[00:04:10] Nathan Sweeney: Generally, if they're purchasing more, it gives you an indication that the economy is expanding, if they're purchasing, it just means the economy is probably shrinking and we get data for the US, the UK, France, Germany, and Japan this week.

[00:04:24] Nathan Sweeney: So those PMI's will just give us a broad indication of what's happening at an economic level.

[00:04:29] Sheldon MacDonald: Those always keenly watched because they're one of the first readings, one of the first prints to come out, so the early warning signs that we can get from that, always very important. Anyway, thank you very much and we look forward to speaking to you again next week.