Monday Espresso Podcast 23rd May 2022

[00:00:00] Sheldon MacDonald: It's the 23rd of May a difficult week for markets last week with most equity markets struggling, the UK, though, one of the signs of light recording in the end a flat return, not bad in comparison to some other regions.

[00:00:12] Sheldon MacDonald: We've got Raj on the line with us this morning. Raj, your comments on the UK, last week.

[00:00:16] Raj Manon: We had a number of data releases in the UK last week. The main one, being an inflation number that came in at 9% and that's the highest rate of inflation we've seen since 1982. It was a large increase from the March number of 7% and that was mainly due to an increase in the energy price cap of 54%. Interestingly, energy was not the only contributor to the high inflation number.

[00:00:40] Raj Manon: There was signs of more generalized inflation with various components of the CPI basket increasing in the high single digits. Looking ahead, will also likely to see further upward pressure in October when the energy price cap will be revised again.

[00:00:56] Raj Manon: It's therefore expected that we will see double digit inflation in the UK in the coming months and due to these inflationary pressures, the market has raised its expectations for where interest rates will be this time next year to two and a half percent.

[00:01:11] Sheldon MacDonald: A difficult period indeed, one sign of light though, were the unemployment numbers that we saw last week.

[00:01:17] Raj Manon: That is a shining light corporates do appear to be weathering the storm.

[00:01:21] Raj Manon: One way we are seeing this is through companies being able to pass on these higher costs that they're experiencing, and that's to maintain their margins.

[00:01:29] Raj Manon: In addition, corporates are still hiring, unemployment is at a 50 year low, here in the UK of 3.7% and for the first time, since records began, the number of vacancies is larger than the number of people unemployed.

[00:01:44] Sheldon MacDonald: So on the back of that, we are seeing wages rising, but of course, inflation is rising faster than wages are rising, which creates negative, real wage growth, which obviously is still a very concerning picture.

[00:01:54] Sheldon MacDonald: So UK equities, as we said, ended flat, the US market was weaker.

[00:01:58] Sheldon MacDonald: Nathan, can you take us through what you saw in the US last week?

[00:02:01] Nathan Sweeney: Yeah, sure. So we did have a difficult week for US equities and there's two key reasons behind this. The first was company earnings. We had Target who's one of the big box retailers reporting their earnings and they missed earnings estimates and the reason they missed is, because they're talking about the fact that they have higher input costs impacting profits.

[00:02:21] Nathan Sweeney: So the concern for the market here is will these companies pass those price rises onto consumers and further inflame inflation? And then secondly, we had the central bank, governor, Jerome Powell coming out and stating the fact that it was necessary for some pain to get inflation under control. The markets obviously didn't like this because the Fed has always been there reassuring markets for the last number of years, which has created environment where equities have done quite well.

[00:02:49] Nathan Sweeney: So these are the two key reasons why you saw some downside selling in the US last week.

[00:02:54] Sheldon MacDonald: Where we did see some strength in markets was in China, some positive news there out of China, some of the COVID measures that have been put in place starting to ease, particularly in Shanghai, which is the key manufacturing hub also easing monetary measures.

[00:03:07] Sheldon MacDonald: So a reduction in some of the bank rates there and that's creating a positive mood and a rebound there in China.

[00:03:13] Sheldon MacDonald: But still supply bottlenecks there and so that obviously still leading into this inflation higher for longer narrative. That's been playing out in markets this week.

[00:03:21] Sheldon MacDonald: A word on ESG. We saw some interesting ESG developments over the week. Nathan.

[00:03:26] Nathan Sweeney: Yeah. So ESG was definitely in the news last week.

[00:03:29] Nathan Sweeney: So we did have a news that the S&P 500 ESG index, so basically they have an annual rebalance for that index, and as part of that rebalance, they've taken, electric vehicle maker, Tesla out of that index.

[00:03:42] Nathan Sweeney: That's quite contentious, really, if you think about it, because Tesla is really kind of pioneered the electric vehicle space and Elon Musk, the owner of Tesla was not really happy about this and he took the Twitter. Talking about the fact that Exxon, which is, you know, obviously an oil company is rated top 10 in that index and Tesla, which is an electric vehicle maker is obviously not in the index.

[00:04:03] Nathan Sweeney: So that was definitely doing the rounds last week.

[00:04:05] Sheldon MacDonald: So ESG is a fast-paced developing area of the markets. Still a lot of things that we need to get to grips with. How about the week ahead? Some big news coming out of the US on the inflation front.

[00:04:17] Nathan Sweeney: Yeah, so the key data point for me, I think is PCE. It's called Core PCE, and the central bank really looks at this measure as a gauge for inflation.

[00:04:26] Nathan Sweeney: Obviously, this is important because inflation is the real reason we've seen interest rates rising in the US, so if we get lower inflation. Less interest rate rises, which would be good for companies. Good for markets.

[00:04:36] Sheldon MacDonald: Well, let's hope we do get a good outturn on that front. We can certainly do with some recovery after the doom and gloom that we've seen in the last couple of weeks.

[00:04:43] Sheldon MacDonald: Please join us again next week. Thank you.

[00:04:45] Nathan Sweeney: Thank you