Monday Espresso Podcast - 22nd May 2023

[00:00:00] Sheldon MacDonald: It is the 22nd of May, it was a pretty positive week for equity markets last week, less so on the bond side, but we'll come to that in a second. With that strength in markets that we saw last week, we're seeing markets actually putting in a pretty strong performance for the year to date. Germany is now at a record level.

[00:00:18] Sheldon MacDonald: The NASDAQ gives up 20% on the year. The UK market we're less than 5% off a record high. Pretty strong markets and largely down to growth stocks.

[00:00:28] Nathan Sweeney: Yeah, so we've seen a really good performance from growth so far this year, and this is very different obviously, to the performance last year where growth was in the headlines, selling off substantially and some really strong returns coming in this year.

[00:00:41] Nathan Sweeney: So a good bounce back, and that's in anticipation of lower interest rates. Maybe we see that at some point this year, but we do know that we are closer to the top in that rate rising cycle, and those growth stocks rebounding in anticipation of those peaks.

[00:00:57] Sheldon MacDonald: Now we did see the markets, especially in the US, come down a little bit on Friday, and that was really because we still had an impasse on the debt ceiling discussions. Markets really still expecting that they will reach an agreement and that's why there was only a mild decline. But the fact that we haven't yet does give us a little bit of course for concern.

[00:01:18] Sheldon MacDonald: On the other hand, we're hopeful that perhaps this coming week we might see something.

[00:01:22] Nathan Sweeney: Yeah. So what we've seen last week is that a number of the people involved in those negotiations have come out and said, look, we're gonna get a deal done and they're obviously a bit of backwards and forwards and that's creating the volatility in markets but even Joe Biden, he was at a G7 meeting over the weekend, and he's flown back to the US so that he'll be available to ensure that they can get something done and the market is expecting that we do get a deal done this week on the debt ceiling.

[00:01:51] Sheldon MacDonald: Now I said we had come back to bonds. Bonds were a bit weaker and really just also that weakness based on this debt ceiling impasse reminder that if they don't reach a deal, the taps turn off, there is simply no further money to pay things like in particular, what bonds are concerned about coupons on outstanding bonds. So bond market, a little bit concerned about that, but as we say, we still think there will be a deal done in time.

[00:02:17] Nathan Sweeney: Absolutely, and I was actually reading some Goldman Sachs research just now, and they're actually pointing to that point and saying the government is likely to run out of money by June 8th or 9th, so it really does put the pressure on the government to get something done.

[00:02:32] Sheldon MacDonald: Absolutely. Now you mentioned the G7 meeting. We haven't seen any market moving announcements out of that, clearly though China was the hot topic there. A lot of the G7 nations really rallying round indicating that they are concerned about what's happening with China's more militant stance vis-a-vis Taiwan in particular, but also around security and the tech issues that have been bubbling around for a while.

[00:02:57] Nathan Sweeney: Yeah, so a lot of concerns about AI, what that means, do we need to regulate it? So I think a lot of governments are trying to get their head around that. So that was one of the topics of discussion at the G7 meeting.

[00:03:09] Sheldon MacDonald: Now let's look at data that came out last week. We did have a somewhat surprising inflation figure out of Europe.

[00:03:16] Nathan Sweeney: Yeah, so the numbers came in a little higher than expected. So we have European inflation is currently running at 7%, but we have to remember it has been trending down and we talked about that ebb and flow of the data. But we do continue to expect inflation number to continue down.

[00:03:32] Nathan Sweeney: I think there was higher energy prices coming in and feeding into that data but we have seen inflation pretty much in most developed markets, falling from about the middle to the back end of last year and if we think back to when inflation started to rise, it took about 18 months from the beginning of the rise to the peak and we expect something similar on the way down because generally when you get a rise in inflation, it's symmetrical so the fall should take a similar period.

[00:03:59] Nathan Sweeney: Given the fact that inflation only began to start a fall towards the back end of last year. We've got a bit of a way to go, but clearly the trend is down, which is positive news.
[00:04:09] Sheldon MacDonald: We have seen wage pressures start to moderate in the UK. That clearly is important on the inflation front, perhaps less positive for us as consumers.

[00:04:19] Nathan Sweeney: Yes, and I think that's a very important point because we really need to look at the consumer to see is the consumer holding up and actually this week we get two really important data points. We get inflation data in the UK, so remember inflation has been running at 10.1%.

[00:04:36] Nathan Sweeney: We do expect to see it fall to the lower eight regions, so about 8.3%. I think that's what the consensus of the market is thinking. But we also get retail sales data because we wanna see that people are out there still spending and driving economic growth because that's an important driver of economic growth.

[00:04:55] Sheldon MacDonald: Now Nathan's talking about UK retail sales. We did see perhaps a precursor in the US in particular on Friday, Footlocker, the big shoe and sporting goods retailer was down 27% on the back of weaker results, and perhaps an indication that some of the interest rate hikes that we've been seeing are now starting to bite and keep a close eye on what that looks like here in the UK.

[00:05:19] Sheldon MacDonald: Otherwise, for the week ahead, what have we got?

[00:05:21] Nathan Sweeney: So it'll be a bit of a busy week. We've got that economic data in the UK, so inflation, retail sales.

[00:05:28] Nathan Sweeney: We've got Fed meeting minutes, so these are just the meeting minutes from the central bank meeting in the US. So people want to know what the people behind that meeting are thinking. Do they think we're at the peak in terms of interest rates?

[00:05:39] Nathan Sweeney: And then we have PMI data, so this is purchasing manufacturing index. And ultimately it's just a survey of managers that work in the manufacturing sector to see what they're thinking. Are they employing? Are they taking on new stock? And it just gives you a gauge for what's happening in that space.

[00:05:56] Nathan Sweeney: So we get that data out for a raft of different countries, Europe, et cetera.

[00:06:01] Sheldon MacDonald: As always, plenty to talk about, plenty to look at for the week ahead. We look forward to speaking to you again next week.