Monday Espresso Podcast - 24th April 2023

[00:00:00] Sheldon MacDonald: It is the 24th of April today. Last week we saw relatively calm markets for a change, both on the equity side and the bond side. So let me give you the negative side, balanced by the positives, Nathan will come in on the positive side, give us the sunny upside in a second.

[00:00:15] Sheldon MacDonald: The negative side is the fact that expectations for rate cuts later on this year are declining. So this is a situation where good news is bad news, so the easing of the bank stresses has led to a situation where the need for significant rate cuts in the very near future are coming down, also though we have had a little bit of economic data that's been a bit mixed, some of the inflation figures, there's been some, some mixed feeling about that and so, as I say, the expectations for further rate cuts this year coming down, and that's hampering the market's expectations for future growth.

[00:00:51] Sheldon MacDonald: As I said though, Nathan's got the sunny upside. What is the positive picture last week?

[00:00:55] Nathan Sweeney: Well, let's start with company earning. So, so far about 88 companies have reported and generally those companies are surprising to the upside, so delivering results, which are better than expected.

[00:01:07] Nathan Sweeney: The interesting piece is if we focus in on some of the regional banks, because a lot of people have been concerned about regional banks because of the collapse of SVB, we've seen some outflows from some of these regional banks because depositors are uninsured but there was a company called Western Alliance Bank Corporation. They reported their earnings last week and the stock was up 24% because they've come out and told the market that they're seeing withdrawals, stabilizing, and actually in the two weeks towards the end of the March, they actually saw some inflows to taking some deposits.

[00:01:43] Nathan Sweeney: So that's gone a long way to kind of alleviate the concerns in the market that there's a problem within the regional banks within the US.

[00:01:51] Sheldon MacDonald: Looking further than the banks though, so broadly, 76% of the companies that have reported have delivered ahead of expectations and the amount that they're beating the forecasts by has also been ahead of expectations.

[00:02:04] Sheldon MacDonald: Perhaps what's good news is that they're doing it because they're improving their margins, not because of revenue.

[00:02:11] Nathan Sweeney: Yeah, so generally what we're seeing at the moment is companies are cutting their costs, so they're taking down some of their fixed costs, you know, so whether that's, you know, leasing a cheaper building or reducing some workforce and it does mean that these companies will be leaner coming out the other side of this downturn or potential downturn or slow down in markets because they'll have a lower cost base, and therefore they'll be more productive on the other side of that and the market knows that and obviously likes that fact as well.

[00:02:38] Sheldon MacDonald: Yeah, so as we said, positive on earnings so far, again, just to throw a little bit of doubt into that, analysts are still cutting their forecasts for the next couple of quarters. At the moment though, Q4 is still expected to be a record earnings level for the S&P. That potentially is slightly optimistic given the current travails that the market and the economy is facing.

[00:03:00] Sheldon MacDonald: So cuts on the earnings front, probably coming in the weeks ahead. Let's turn closer to home though, we had the UK inflation figure that came out last week.

[00:03:09] Nathan Sweeney: Yeah, so a lot of people will look at this data print that we had last week and think, actually, that's bad news. Inflation is falling, but it went from 10.4% to 10.1%.

[00:03:18] Nathan Sweeney: People were expecting a bigger fall, and as a result of that, what we've seen is now people expect the central bank is in the Bank of England to raise rates one final time in May but what we did is we dug into the inflation numbers a little bit deeper just to try to understand what to expect going forward.

[00:03:36] Nathan Sweeney: The interesting piece that we came across was, if you look at the inflation reading between March and April of 2022, we saw one of the biggest jumps in the inflation reading since the data started to be compiled and essentially you saw inflation going up by 2.5% between March and April of 2022 and that's because you saw a 52% increase in energy prices as a result of the invasion of Ukraine.

[00:04:08] Nathan Sweeney: Now, the interesting piece is that we don't expect something similar to happen in next month's reading, and that'll be a year on from that data print. So all else equal, you should expect inflation to fall substantially from that 10.1%, likely to enter about 7% to 8%. The Bank of England knows that and that's why they're fairly relaxed about inflation.

[00:04:31] Sheldon MacDonald: So we do have the central bank meetings coming up. Next week, sees the US Fed meeting and we'll see what comes of that. Probably, well the market's still expecting one final interest rate hike of 25 basis points, 0.25% and then as I said at the start, cuts coming later in the year.

[00:04:49] Sheldon MacDonald: For the week ahead though, we've got the US Q1 GDP, market expecting fairly healthy, 2%, and we've also got Euro GDP coming out but then as we've spoken about, we've got earning season.

[00:05:03] Nathan Sweeney: Yeah, so the focus here will actually be on the tech companies. Interesting point, tech stocks or tech stocks or that sector have actually wiped out all of the losses that they had from last year, so we've seen a really strong rebound in tech thus far.

[00:05:17] Nathan Sweeney: So people are gonna focus on the earnings of these companies to see can they sustain that in the short term. So we've got the likes of Microsoft, Alphabet, Facebook, Amazon reporting this week, along with Coca-Cola, Visa, Boeing, MasterCard, Exxon Mobile.

[00:05:31] Nathan Sweeney: So it's gonna be a big week from an earnings perspective. So the market will be very much focused on what these companies have to say.

[00:05:38] Sheldon MacDonald: Absolutely, and also market, starting to be able to pull out some divergences perhaps between the service sector and the manufacturing sector. So look out for that and we'll be sure to keep you updated next week.