Monday Espresso Podcast 30th August 2022

[00:00:00] Sheldon MacDonald: It is the 30th of August today. Last week was a tough one for us here at home and really all around Europe, but certainly here in the UK.

[00:00:08] Sheldon MacDonald: The big news was the increase in the energy price cap, and that really was just another reminder for all of us, certainly in our back pockets, reminding us that inflation is still with us and is going to be here to stay for some time, even if markets had perhaps started to take a slightly more positive view.

[00:00:25] Sheldon MacDonald: Markets though, brought down to a bump on that here in the UK, but also internationally with the Jackson Hole symposium of the central bankers.

[00:00:33] Nathan Sweeney: Yeah. So that was the big news really last week. So we saw the equity markets actually took a bit of a hit on Friday.

[00:00:39] Nathan Sweeney: So why was that? So the US Federal Reserve chairman Jerome Powell has come out and said that the Fed is committed and remains committed to raising interest rates, even if that means there's a potential for a recession.

[00:00:54] Nathan Sweeney: So why did he say that? He's saying that basically because he thinks that the recent falls in inflation fall far short of the mark because they're looking to target a rate of inflation of around 2%.

[00:01:08] Nathan Sweeney: So they want to see inflation coming down a lot before they take their foot off the interest rate rise throttle.

[00:01:15] Sheldon MacDonald: Of course, the other thing that Powell has said he's focused on is cooling the jobs market. Perhaps this coming week we'll get the jobs report that might give us some indications of whether, in fact, some of the moves that we have had in interest rates so far have had an impact on hiring practices but I guess we'll see that during the course of this week.

[00:01:34] Sheldon MacDonald: In the meantime though, both equity and bond markets, certainly in the Western world, struggling on the news of that more hawkish tone from the central banks.

[00:01:43] Sheldon MacDonald: There are though pockets of opportunity, pockets of area where investors can find some diversification.

[00:01:49] Sheldon MacDonald: Asia was a bright spot last week and China, in particular, doing a little better, and really the focus there is the fact that the Chinese central bank still has room to manoeuvre still providing stimulus for the market, really looking to get a handle on some of the travails that they've had on the property side, and really looking to push ahead.

[00:02:08] Sheldon MacDonald: So a slight bit of diversifications, some slight positive moves there on the Asian front. As I said, though, most domestic and western markets struggling.

[00:02:18] Sheldon MacDonald: Looking at the week ahead though. Hopefully, we get some indications, as I said earlier about the path that economies are now taking, given the moves that we've had.

[00:02:26] Nathan Sweeney: Yeah. So looking at the week ahead, actually, we have quite a bit of data coming out. So on Thursday we've got manufacturing data.

[00:02:32] Nathan Sweeney: So that's gonna give us a bit of insight into manufacturers and how they're dealing with higher input costs.

[00:02:39] Nathan Sweeney: Are they managing that? What does it mean? As you mentioned, we've got the jobs report on Friday.

[00:02:44] Nathan Sweeney: So are company's still happy to hire in this environment? Are they laying people off? Are interest rates having an impact on those companies? And again, we'll get a clearer picture on that this Friday.

[00:02:54] Nathan Sweeney: We also have a lot of inflation data out, particularly for the Eurozone. So we've got inflation readings coming out of Germany, France, and Spain.

[00:03:02] Nathan Sweeney: And again, we know that gas prices have been feeding through, into inflation in Europe. So we'll see, are we at the peak inflation levels in Europe or is there still more pain to come on the inflation front?

[00:03:12] Sheldon MacDonald: Of course, on the inflation front we had previously, as we mentioned, started to see really some slightly positive news out of the US.

[00:03:19] Nathan Sweeney: Yeah. So as we know, people are returning from holidays, summer's nearly over, but the one thing that isn't over is volatility and the reason for that is because of inflation.

[00:03:29] Nathan Sweeney: But there is some good news because the Fed looks at a measure of inflation called the personal consumption expenditure price index and if we look at the data that's been coming out recently, it has been falling.

[00:03:44] Nathan Sweeney: So we had a printout last week and it came in at 6.3% from 6.8% the previous month.

[00:03:51] Nathan Sweeney: So it is moving down and if you look at the core number, the core number, which excludes food and energy, came in at 4.6% and that's a lot closer to the Fed's target of 2%.

[00:04:04] Nathan Sweeney: So the Fed is not declaring victory yet in the fight against inflation. But we're getting closer.

[00:04:10] Sheldon MacDonald: Certainly getting closer, but the Fed or central banks around the world need to be seen to be talking tough on inflation. They need to be seen to be committed, to getting a handle on it. So expect further hawkish tones from the central bankers.

[00:04:25] Sheldon MacDonald: Meanwhile, in the week ahead here in the UK, closer to home, I guess all the news inches will be filled with the prime ministerial selection. That's happening. Again, the uncertainty that that creates is probably going to add to the volatility that we are seeing. So volatility, as Nathan said, it's still the order of the day.

[00:04:42] Sheldon MacDonald: Anyway, lots to look out for and we look forward to speaking to you again next week.