Monday Espresso Podcast - 25th September 2023

[00:00:00] Sheldon MacDonald: It's the 25th of September today, a weaker week last week, all around. Equities were weaker across the board and bonds a little bit mixed, but as we'll mention a little bit later, largely weaker. The big news of the week was central bank meetings and we had interestingly, a pause from the central banks for the first time in how many months is it Nathan?

[00:00:22] Nathan Sweeney: Yeah. So we've seen interest rates going up for the best part of a year and a half now. So this is really, really good news. We've seen central banks finally coming to an end of that rate rising cycle. So we've seen both the UK central bank and the US central bank pausing in the same week. But the big question for the markets is, will this pause remain in place and will it lead to rate cuts or will they have to raise interest rates again?

[00:00:47] Sheldon MacDonald: Yes, interestingly, on the UK side, the central bank in their comments, noting that inflation has been slowing unexpectedly. We saw that figure out last week, food and accommodation figures pulling that inflation number down. Still, though, the vote was tied at 4 4 and the governor of the central bank had to cast the deciding vote.

[00:01:08] Sheldon MacDonald: So a 5 4 vote to keep rates on hold, whereas on the US side it was a unanimous vote. The difficulty though that markets saw, was the hawkish tone of the comments, particularly in the US, and that saw US Treasury markets weaken quite badly.

[00:01:24] Sheldon MacDonald: A US Treasury yield hitting a 16 year high and really, as I said, responding to that hawkish tone, the dot plot, that is the expectations where the central bankers in the meeting expect to see rates in the next coming months, showing that they expect rates to be higher for longer.

[00:01:43] Nathan Sweeney: Yeah, that's interesting. So I think if you really think about central banks, the messaging that they have to communicate, it's likely that they're going to talk to the fact that their job against bringing down inflation is not done.

[00:01:57] Nathan Sweeney: They have to say that, and ultimately it just leaves the door open should inflation reassert itself, then they have the optionality to increase rates. But interestingly, you've had both central banks pausing last week. You've had bond yields hitting highs.

[00:02:14] Nathan Sweeney: So this could be a real turning point. So from our perspective, we're going to continue to watch that inflation data quite closely and look at economic growth quite closely just to see how it's all panning out. But from our perspective, you know, it's definitely good news.

[00:02:28] Sheldon MacDonald: Speaking of economic growth, some of the interesting expectations in recent months, weeks, we've been talking about the soft landing narrative taking hold. It was interesting that the chairman of the Fed, Powell, mentioned in his comments that a soft landing is not their baseline expectation.

[00:02:46] Sheldon MacDonald: Market participants getting a little bit concerned about that. Interestingly, on the UK side, I actually took a clip of this from the FT this week. Two headlines next to each other, the first one saying, UK recession risk rising because services activity is weakening. The very next headline saying, retail sales rebound as shoppers return.

[00:03:09] Sheldon MacDonald: So we've got this mixed picture on the economic growth front and as we know, markets don't like that sort of uncertainty. And again, hence some of the weakness that we saw.

[00:03:19] Nathan Sweeney: Yeah, and we've had this big tug of war between the economic data on one side and the consumer on the other side and the consumer has been winning out.

[00:03:26] Nathan Sweeney: It's been a lot more resilient than people expect and we're still seeing signs of that resilience coming through. So that's why the central banks are just giving that cautious tone because ultimately they're trying to get consumers to stop spending. So it's called Fed speak when they talk tough, trying to get their message across.

[00:03:44] Sheldon MacDonald: Another picture that is a little bit worrying is inflation, returning to that theme. The oil price is now at a 10 month high, just top $90 a barrel during the course of last week and that's giving some people again some concerns, thinking about the tug of war between inflation coming down on the one hand, we've got easing wage pressures, but then again we've got rising oil prices. That could work through the system and increase inflation at all levels.

[00:04:11] Sheldon MacDonald: We'll get the picture of the growth and the inflation numbers during the course of this week, right?

[00:04:15] Nathan Sweeney: Yeah, so this will be a big week for economic growth. So we get growth figures out in the UK and we get growth figures out in the US. So for the UK, we're looking at growth of 0.2%. For the US 2.1%. So back to that question of soft landing, worse than a soft landing recession. 2.1% economic growth is not a soft landing, it's strong growth. But then we also get inflation data, we've been talking a lot about inflation. We get Eurozone inflation data and that number continues to trend down. I think it's currently 5.2% expectation. It falls to 4.5%. So moving in the right direction there as well.

[00:04:52] Sheldon MacDonald: It feels like a big week coming up and we look forward to speaking to you again next week.