Monday Espresso Podcast 21st November 2022

[00:00:00] Sheldon MacDonald: It's the 21st of November. Good morning. A fairly quiet but positive trending week last week. Generally up moves in both equities and bond markets. The main news here locally last week was the Autumn Statement, and we are seeing news that we're going to get tax hikes and there's going to be spending cuts.

[00:00:19] Sheldon MacDonald: All of that though, was largely flagged beforehand, before the Autumn Statement announcement, and so it didn't really move markets.

[00:00:27] Nathan Sweeney: Well, actually we saw a little bit of a positive move in the UK market on the news. So UK equity is actually one of the best performing markets last week, so it was up over a percent and then Europe also was up about 1.46%. So a bit of positive reaction in markets there last week.

[00:00:44] Sheldon MacDonald: Inflation though again, still in the headlights, US versus UK inflation. So we saw in the wake of the central bank meeting a lower than expected inflation number out of the US, but the UK number reaching a 40 year high.

[00:00:59] Nathan Sweeney: Yeah, so definitely different inflation figures in different regions and I suppose the point here is that you should expect inflation to normalise at a different pace in those regions because you do have different factors feeding in.

[00:01:14] Nathan Sweeney: So to give you a good example of that, if we look at the US energy or the petrol price is less of a factor when you think about inflation, and that's why inflation has been trending down.

[00:01:26] Nathan Sweeney: Whereas if you look at the UK, if we look at gas prices and electricity prices, they're a big component of the feed through in inflation today, and that's why we have inflation coming in at 11.1%, and that's the highest reading we've had in over four decades.

[00:01:43] Nathan Sweeney: The reality is, is that energy prices and gas prices, they have been falling, so the expectation is that we are at or close to peak inflation in the UK and it should follow the trend that we're seeing in the US and that trend being down.

[00:01:58] Sheldon MacDonald: Well, the trend may be down. We do still expect though a hawkish tone when we see the minutes of the Fed meeting this week. The Fed does need to continue talking tough.

[00:02:08] Sheldon MacDonald: They need to be seen to be absolutely on top of inflation, making sure that they're gonna get it under control. So definitely still expecting a hawkish tone. Having said that, though, we have seen a couple of the central bankers speaking this past week just mentioning that although the pace of rate hikes may ease from here on out, the terminal rate might end up being higher than people are currently expecting.

[00:02:33] Sheldon MacDonald: So perhaps a mixed message, but we'll have a look at those central bank minutes to see if there's a change in tone there. Now, Nathan, you mentioned energy prices, we did see the oil price down quite nicely last week.

[00:02:46] Nathan Sweeney: Yeah. So a big move in the oil price was down almost 10% last week. What was driving that?

[00:02:51] Nathan Sweeney: You've seen a resurgent in Covid outbreaks in China, and the rationale here is that that will lead to lower economic growth in that region, as you should expect some shutdowns to tackle those higher rates of covid, and that's likely to lead to less demand from China for oil and China's actually the largest importer of oil globally and that's why you've seen a big move in the oil price, so it was actually down below $80 a barrel last week, and again, from an inflation perspective, that's good news because energy prices have been one of the biggest factors in driving up inflation, so if energy prices are coming down, that should feed through into lower inflation.

[00:03:31] Sheldon MacDonald: Now we have Thanksgiving in the States this week, now Thanksgiving, then leads on to Black Friday, we've all seen the adverts, we've been told about Black Friday for the last month or so, but that perhaps could give us the first indication of consumer strength despite the inflation that we've been seeing, or perhaps not, perhaps the consumer may hold back, and so people are looking at this for an indication of how people are thinking going into the spending season ahead of us.

[00:03:59] Sheldon MacDonald: Also this week, plenty of central banks meeting. Now, could we be seeing a change in trend, Nathan?

[00:04:05] Nathan Sweeney: Yeah, so that's an interesting point. So what we've seen is that in the main, central banks have been increasing interest rates globally, and over the last couple of meetings you've seen one or two central banks coming in and cutting interest rates.

[00:04:19] Nathan Sweeney: And we've seen a number of other central banks indicating that they're going to increase their interest rate rises at a slower or lower pace. Now we've got the Central Bank of China, New Zealand, Turkey, Malaysia, South Africa, they all have meetings this week and people will be focusing on those meetings to see are they following that trend?

[00:04:40] Nathan Sweeney: Are we seeing less interest rate rises coming through, or the amounts of that interest rate rise being smaller, or are we seeing interest rate cuts? Because if that trend starts to develop, that will then tell us that central banks believe they have inflation under control.

[00:04:58] Sheldon MacDonald: Yeah, here's hoping. We hope to speak to you again next week.

[00:05:01] Sheldon MacDonald: Thank you.