Monday Espresso Podcast - 21st August 2023

[00:00:00] Sheldon MacDonald: It's the 21st of August today. Weaker markets last week. We'll come to those in a second. Let's start off on the home front though, the big news last week, the inflation print that we saw last week, quite a big drop down from the previous month, Nathan.

[00:00:13] Nathan Sweeney: Yeah, so inflation has been the key focus for markets for a very long time now.

[00:00:18] Nathan Sweeney: So over 18 months, people obviously concerned about prices rising and staying elevated. But the good news is inflation continues to fall. So we're seeing those prices or the rise in prices rising at a slower rate. So inflation came in at 6.8%, down from 7.9%. So a big jump down and the reality is things like fuel prices have been falling, and that's coming into the inflation data. So this is good news for consumers.

[00:00:47] Sheldon MacDonald: You say that, but there has been a counter argument to that that says, well, you know what, the core inflation rate, which takes out those volatile things like fuel, that was unchanged still at the higher level, 6.9%.

[00:00:59] Sheldon MacDonald: Wage growth was higher. So perhaps a cautionary measure there.

[00:01:03] Nathan Sweeney: Yeah, so you would expect wage growth to be higher in an environment of higher inflation, but you have to remember now that inflation is falling. You can't expect to see that continued wage growth because obviously if you're an employer and you say, well, inflation is lower, I don't need to give you those high wage rises.

[00:01:21] Nathan Sweeney: So for me, I think this is a one-off. It's in reaction to the high inflation. But because inflation is coming down, I'm less concerned about wage inflation.

[00:01:29] Sheldon MacDonald: Let's pivot across to the US where we saw last week, the minutes from the July Fed meeting at which they raised rates possibly for the last time, the minutes, really reiterating the Fed's stance that the economy is pretty healthy.

[00:01:44] Sheldon MacDonald: We're in soft landing territory, so perhaps no recession, despite the big increases in interest rates that we've seen, so the higher for longer interest rate narrative seems to be taking hold. And last week we saw treasury yields rising. So the 10 year treasury bond hit its highest yield level since 2007.

[00:02:04] Nathan Sweeney: Yeah, so the expectation here is obviously that central banks will sit on rates at a higher level for a prolonged period of time. But interestingly, if you look into the minutes of that meeting, you've got all the members of that committee and they all vote on whether they think rates should rise or not, and they all have a say and you have conflicting views between those members.

[00:02:24] Nathan Sweeney: Some of those members think, yes, inflation is a risk, but others think the excessive interest rate rises we've had to date could have an impact on consumers. So you can see a change in view there.

[00:02:35] Sheldon MacDonald: Well, we might get more of that in this coming week. We have the big annual symposium of Central Bank leaders in Jackson Hole and certainly the marquee event there is the speech by Jerome Powell. Everyone looking forward to seeing what he'll have to say there.

[00:02:49] Nathan Sweeney: Yeah, so this is a big one. So they have this conference once a year. It's in Wyoming, Jackson Hole. You'll hear about it. It'll be in the news this week. Lots of central bankers there. They'll be talking about things like global growth, the impact of inflation, interest rates, so everybody will be focused on that to see if there's any hint of central banks saying, actually, we're winning the war against inflation.

[00:03:10] Nathan Sweeney: Interest rates probably don't need to rise anymore. Unlikely, but the markets will always hope for that.

[00:03:15] Sheldon MacDonald: Speaking of global growth, some concerns in China, we've seen a downturn there and just in this past week, equity markets there down quite heavily. The downturn there, the disappointment really on the post covid recovery and really people starting to speak about a risk of deflation.

[00:03:32] Sheldon MacDonald: We mentioned that last week, we've got concerns on the housing market. Will they lead to contagion? Remember Evergrande? We spoke about that, what about a year ago, where they defaulted on some of their loans? Evergrande one of the biggest property developers. They've now just in this past week, filed for bankruptcy support.

[00:03:49] Sheldon MacDonald: So what's going on there in China?

[00:03:51] Nathan Sweeney: Yeah, so it's interesting here, China is one of the biggest economies in the world. They've heavily invested in property over the last decade, and now they're trying to cool that investment into property, and ultimately this is creating problems within the property market.

[00:04:05] Nathan Sweeney: This big company here, property developer, Evergrande, is looking to default, so basically not make payment on their overseas bonds and there's 19 billion of these overseas bonds outstanding. So that's clearly not good news if they're looking to file for bankruptcy, but it just shows you the state of the property market within China.

[00:04:26] Nathan Sweeney: It's not in great shape, and ultimately what we expect to happen is for the government to step in with measures to try and address this. They're doing it, but they're doing it slowly. The market would like to see it happen quicker.

[00:04:37] Sheldon MacDonald: On that front, we did see a measure of policy support coming in. There was a surprise cut to one of the key lending rates, but only by about 10 or 15 basis points. So 0.1, 0.15%, so perhaps more to come.

[00:04:52] Sheldon MacDonald: Let's bring the focus back locally. UK, we're just about at the end of the earnings season now we speak about earnings a lot, usually to do with the US because there's so much more data there and so many more companies giving us so much more information. But the UK earnings season, just coming to the end. A positive surprise, about three to 4% the earnings ahead of expectations. So a positive story on that front.

[00:05:14] Nathan Sweeney: Yeah and speaking of earnings, the week ahead, big week for a company called Nvidia. So if you remember, Nvidia was the big company who's at the heart of artificial intelligence.

[00:05:24] Nathan Sweeney: So they make these chips that go into computers, which help 'em to go faster, and basically they blew their earnings out of the water three months ago. They were expected to earn 7 billion. They earned 11 billion. The share price rallied really, really strongly. They report this week. So all eyes on that company. Is the AI hype real? We'll find out.

[00:05:45] Sheldon MacDonald: Let's look for that next week. We look forward to speaking to you again then.