Monday Espresso Podcast 26th September 2022

[00:00:00] Sheldon MacDonald: It is the 26th of September today. I feel like I've said this before, but it was another difficult week for markets. Last week, we had red screens across the board, equities and bonds in just about all regions, Nathan, what was going on?

[00:00:14] Nathan Sweeney: Well, several of the world's central banks were raising rates last week.

[00:00:18] Nathan Sweeney: So if we look at interest rates in the US, they increased by 0.75% and are now at 3.25% and in the UK, we got half a percent increase in interest rates or interest rates are now 2.25%.

[00:00:33] Nathan Sweeney: Interestingly, what tends to happen when you get interest rate rises is that markets do come under pressure. However, it is important to remember that we are closer to the end of this rate-rising cycle.

[00:00:46] Nathan Sweeney: So you almost have to think about it, it's the last 10 minutes of the match, the Fed is just making sure they get the job done but historically markets always tend to outperform once you get that peak in interest rate rises.

[00:00:59] Nathan Sweeney: We're almost there on this one.

[00:01:01] Sheldon MacDonald: Let's hope so. Furthermore, you know, in terms of taking the positives out of what we've seen, there were some markets that were actually green, i.e. In positive terms last week, if we look at it in Sterling terms.

[00:01:13] Sheldon MacDonald: So, you know, once converted into Sterling, some of the returns in some of the bond markets were positive, some regional markets were positive. Unfortunately, though, that was because Sterling itself was declining last week and we've got now the weakest Sterling level in decades and that of course driven by what was going on on the policy front Raj is with us today.

[00:01:34] Sheldon MacDonald: Raj, can you give us a summary on that front?

[00:01:37] Raj Manon: Sure. So on Thursday, the Bank of England increased rates by 50 basis points. There was some debate around whether that would be a 75 basis points hike or not, but they went with 50. But the big news of last week was on Friday, the Chancellor unveiled details of the mini-budget, but the details were actually far from mini.

[00:01:58] Raj Manon: It was the largest fiscal stimulus that we have seen since the 1970s, a budget of tax cuts and spending plans and this will be funded with additional debt. This debt is coming at a time when debt is already running at high levels at close to 100% of GDP. The government's hope is that these stimulative policies will generate growth to two and a half percent annually and it's this growth that will offset the debt.

[00:02:29] Sheldon MacDonald: So clearly monetary measures, monetary stimulus, that's been exhausted given the scale of inflation facing us. We can no longer use monetary measures to try and get the economy moving again and so fiscal measures are required and this is the stance that the government has taken.

[00:02:44] Sheldon MacDonald: Interestingly though, it seems like fairly unanimous from an economist standpoint, a unanimous acceptance that, trickle-down economics don't really work and have not really been shown in history to have worked elsewhere.

[00:02:59] Sheldon MacDonald: So a difficult situation at the moment where the government is needing to do something, they're going for tax cuts to provide the stimulus.

[00:03:07] Sheldon MacDonald: The jury really out though.

[00:03:09] Sheldon MacDonald: Let's look ahead though. Nathan, what have we got coming up this week?

[00:03:12] Nathan Sweeney: Yes, we've actually got quite an important data point in the US.

[00:03:15] Nathan Sweeney: It's called the Core PCE or Personal Consumption Expenditure Index, so this is the preferred measure of inflation that the central bank in the US uses, or the Fed uses to try and engage what's happening with prices and if we look at that number over the course of the last couple of months, it has been trending down or coming down.

[00:03:38] Nathan Sweeney: So that'll be important to see if it's continuing with that trend.

[00:03:41] Nathan Sweeney: Additionally, we get inflation data out of Europe and we all know that European inflation data has been trending higher. However, commodities, which have been the biggest factor in that inflation figure, have been falling and oil is now at a level that we haven't seen since January of this year. So the big question will be, are we at peak inflation in Europe, as well as the US?

[00:04:04] Sheldon MacDonald: So a difficult week last week, let's hope for a stronger week this week, lots to speak about next week, I'm sure and we hope you'll join us again next week.

[00:04:12] Sheldon MacDonald: Thank you.

[00:04:13] Nathan Sweeney: Thank you.