Monday Espresso Podcast - 24th July 2023

[00:00:00] Sheldon MacDonald: It's the 24th of July. We had a fairly strong equity market last week, certainly over in the US, up 0.7% on the S&P.

[00:00:10] On a month to date basis though, the S&P is up round about 2%, the big news though there is that over 94% of that move has not been driven by big tech. That's obviously been the feature this year that most of the moves have been driven by the big tech names.

[00:00:27] This time though, this month at least that's not been the case, and this week we had the S&P up 0.7 and we had the NASDAQ registering a negative return. So perhaps maybe we've seen a slight turning point.

[00:00:41] Reason for the strength though in the broader market, that's down to earnings season and we've seen 75% of companies that have reported so far beating their earnings estimates.

[00:00:51] Most of that though, coming through cost management, so it's the bottom line that's doing okay, the top line's still under pressure, we'll get more news on that this week. We've got about 150 S&P companies reporting this week, and perhaps that'll give us more of an insight into how things are, are panning out over in the us but even stronger this week was the uk.

[00:01:13] Raj is on the line today, Raj, what was driving at this week?

[00:01:17] Raj Manon: So the markets were very positive in the UK and the key driver was inflation. So over recent months, the UK inflation data has been reliable for disappointing and coming in higher than expected.

[00:01:31] But the numbers last week provided a nice surprise, by coming in lower than expected, and that is the first time that they have not disappointed in five months.

[00:01:42] The key drivers of those lower numbers were falling prices at the petrol pumps and a much smaller increase in grocery bills.

[00:01:51] Core inflation, which strips out volatile food and energy prices, also produced a positive surprise and fell from 7.1% to 6.9%.

[00:02:04] The markets are hoping that this could be a turning point for the UK inflation data, and this led to a reassessment for terminal rates from around 6.5% to now below 6%.

[00:02:17] Sheldon MacDonald: That's certainly encouraging. Now, you mentioned grocery bills coming down. Just this past week though, we've seen the wheat price go back up again up about 10%, and that's largely in response to the geopolitical moves, the standoff in the Ukraine versus Russia, and the potential blockading of Ukraine ports.

[00:02:36] So perhaps a little bit of concern there on the inflation front with, as I say, wheat prices up around 10%.

[00:02:42] On the back of that positive inflation news, how did bonds do?

[00:02:46] Raj Manon: Bonds were very positive. The guilt market rallied strongly and even across the equity market relief was felt, particularly in home builders and medium and smaller companies.

[00:03:00] Medium and smaller companies are more domestically facing and tend to have higher levels of leverage and therefore benefit most from the falling interest rate expectations.

[00:03:12] Further, good news for smaller companies came from the prices of imported goods. Back in January, imported goods increased 17% year on year, but due to the strength of the pound in 2023 and falls in energy and commodity prices, imported goods prices are now deflationary.

[00:03:32] With a year on year movement of -2%, so this benefits medium and smaller sized companies more as they tend to be net importers of goods.

[00:03:43] Sheldon MacDonald: So pretty encouraging there, and as you say, the positive inflation news is a strong story for those companies.

[00:03:50] Positive inflation news elsewhere, we've got the European inflation that was announced last week down at 5.5%. That's the lowest number they've had since. January, 2022, so declining there as well.

[00:04:03] Raj Manon: And within that European data there are some really positive stories. Spain in particular already have inflation below 2%, and Spain were really on the front foot at combating profit led inflation quite early on, much earlier than other countries.

[00:04:20] Sheldon MacDonald: So far it's been a good news story. There are some little concerns. I mentioned the increase in the wheat price.

[00:04:26] We also had weakness out of China last week. Chinese markets down about 2 or 3%, and that's down to economic growth, they're coming out below expectations about 0.8% on a quarter on quarter basis.

[00:04:41] As I say, that was below expectations. The post pandemic rebound really not shaping up very well in China so far.

[00:04:47] Commentators are starting to speculate around further positive stimulation that needs to come from the authorities there.

[00:04:55] On the credit side. So credit markets, credit spreads have been pretty stable. We commented on this last week, I think, but we have seen some figures that are showing that bankruptcies are starting to rise despite the credit staying fairly strong, so a slight little niggle of concern there.

[00:05:12] Looking at the week ahead though, we do have the FOMC in the US, expected to raise rates this week, pretty much a lock there. Over 99% implied probability of that rate hike of 0.25%.

[00:05:27] That though expected to be the last rate hike in the cycle, 70% odds that that's the last one for the cycle.

[00:05:34] The interest really though, will be on what they say in their statement, what the guidance will be for the months ahead, so certainly watching that space.

[00:05:42] And we also have the ECB out this week, expected also to raise rates, looking also for guidance on what they say about the months ahead.

[00:05:51] The BOE, they don't meet until the following week, so we'll look out for that. And then finally, as I mentioned earlier, we've got earnings season this week, so lots of companies to look out for, lots of company earnings to give us some guidance as to how things might pan out in the future.

[00:06:05] And we look forward to giving you all that news next week.