Monday Espresso Podcast - 23rd January 2023

[00:00:00] Sheldon MacDonald: It is the 23rd of January today, a mixed week for markets last week with a host of economic data released. Once again, the picture really pointing to this ongoing battle between inflation and growth. Inflation, though increasingly seems to be last year's story.

[00:00:17] Sheldon MacDonald: Now confirmed weakening of inflation here in the UK and Europe with weaker figures out last week. Of course, inflation in the US has been easing since pretty much the middle of 2022. Nathan?

[00:00:30] Nathan Sweeney: Yeah, this is actually quite good news because the market has been focused on inflation and growth. So what this means is because we have falling inflation, the market only has one thing to worry about at the moment opposed to two, which is why volatility has been coming down.

[00:00:46] Nathan Sweeney: So you mentioned UK inflation, so that's decreased to 10.5% and it was 10.7% in November, so that's trending lower, and then equally, inflation has been a big problem in Europe as well and that's come down from 10.6% in October to the last reading for December of 9.2%. So you can definitely see inflation is trending down across developed markets, which is good news.

[00:01:11] Sheldon MacDonald: Of course, though, as you've said, that puts the focus on growth and really not a great picture, you know, we've been talking about the potential for a recession for quite some time. Last week we saw retail sales figures out and really not a great picture.

[00:01:26] Nathan Sweeney: Yeah, so on the retail sale front, this is an indication of what's happening in the economy.

[00:01:31] Nathan Sweeney: Are people spending, and we had two sets of retail sales data out last week, so we had retail sales data for the US, and that was weaker. So retail sales fell by 1.1% from the previous month, and also a similar picture in the UK where retail sales fell by 1%. There is a slight interesting nuance because if we think about the things that people have been buying post the reopening, like say a car as an example, we had a lot of demand for cars and used cars, and there was a lack of supply.

[00:02:04] Nathan Sweeney: So therefore the price of these products went. Which fed through into inflation. Now because you've seen supply chains reopen, you've had a restocking for these goods, which has brought the price down. So the retail sales data might actually be skewed because people are still buying at the same clip, but the products they're buying are cheaper, which is why the retail sales data was down.

[00:02:26] Nathan Sweeney: Which is also good for inflation too because it means those prices are coming down. But that could lead to slightly weaker growth.

[00:02:34] Sheldon MacDonald: It's pretty hard to disentangle that. So you've got these conflicting items happening here. Of course, though, the focus then is on what's gonna happen to rates, what is the outlook for recession?

[00:02:46] Sheldon MacDonald: With these weaker numbers, certainly the market in the US starting to price in the potential that the next rate hike may only be a 25 basis point rate hike instead of 50 basis points. Difficult to know, the FOMC meeting is in the middle of February and we are now in a blackout period, so no more guidance from the Fed in the next couple of weeks.

[00:03:06] Sheldon MacDonald: So the market will be taking its steer from the economic releases that it sees. Interestingly, in Europe, we've actually seen the outlook start to improve and that's because natural gas prices have continued to come down, and until now, the relatively mild winter has meant there's less demand. So stocks of natural gas are fairly high, and also Europe getting a boost from the potential China reopening.

[00:03:30] Sheldon MacDonald: Now, one thing that we've seen interestingly, is that inflows into European equities have now increased, or at least have been positive. For the first time since the Ukraine invasion, so certainly a potential glimmer of hope on the horizon there for Europe, which has really been under the Kosh for some time now.

[00:03:50] Sheldon MacDonald: We had data out last week, there's a raft of economic data out this week, but I think the focus is probably more going to be on the earning season, again, more US driven. Now, last week we saw the likes of Netflix and Alphabet releasing their earnings and actually moving up pretty positively. Now, interestingly, Netflix was up over 8%, despite missing their earnings.

[00:04:14] Sheldon MacDonald: Now the positive spin was that they've increased the subscriber base. But the point is when you miss earnings and the stock goes up, the implication there is that the market had already priced in, had discounted some pretty bad news, and the potential then is for a bounce on that basis.

[00:04:32] Sheldon MacDonald: Now, this week, we've got a bunch of companies earnings to do out Nathan.

[00:04:35] Nathan Sweeney: Yeah, so the focus over the first few companies that have been reporting is, you know, finance companies, banks, et cetera. But this week the focus will switch to tech companies because we've got big names like Microsoft, IBM, Tesla, and Intel reporting their numbers.

[00:04:52] Nathan Sweeney: Interestingly, if we look at the performance for the NASDAQ this year, so far is up quite strongly as you've seen a bit of a reversal from value back to growth. So those tech names doing better in an environment where we have an expectation of lower interest rates to come. So a new dynamic kind of changing within the style in markets.

[00:05:14] Sheldon MacDonald: Well, that's all we've got time for. Thanks very much. We hope to speak to you again next week.