Monday Espresso Podcast - 27th February 2023

[00:00:00] Sheldon MacDonald: It is the 27th of February today, can you believe it, already two months into the new year, down. A negative month, finally, a negative week last week across the board, equities and bonds both struggling and really it's to do with the, the good news is bad news scenario that read its head last year. We had some pretty strong economic reports out last week.

[00:00:21] Sheldon MacDonald: We had retail sales in the US that were strong. We had the CPI coming out higher than expected, and we had a strong labor market. 500,000 jobs added in the course of the month bringing the US unemployment rate down to just 3.4%. So some pretty strong indicators there, but that's putting pressure on the rate side of things.

[00:00:44] Nathan Sweeney: Okay. So what we had last week was concerns that inflation is coming back and maybe a little bit stickier than expected. So the key figure that the Fed looks at when trying to gauge what's happening on inflation front is the personal consumption expenditure price index and the figures for the price index came in a little bit hotter than expected.

[00:01:06] Nathan Sweeney: So inflation for the month rose by 0.6% from December to January, and that just reinforces the message that Sheldon's been talking about, the economy has been stronger than expected, so despite all of these rate rises, the economy still strong, but the Fed is obviously trying to bring down inflation, and if you have a strong economy, it means that inflation is likely to persist for longer than expected.

[00:01:31] Sheldon MacDonald: What we're seeing with that strong economy is that company revenues are still rising and that's positive. On the downside though, we're seeing company earnings falling, and that means there's pressure on margins and that pressure is really coming through on the labour cost side of things and that's why the, the Fed, you know, really keen to get a handle on the labour market and so for the moment, keeping those rates higher for longer.

[00:01:56] Sheldon MacDonald: So the market is adjusting to this higher for longer rhetoric. The terminal rate for Fed funds now at the end of last year was stood at about 4.9%, so the highest point that Fed funds rate was expected to reach was 4.9. That's now up at 5.4%, so that rising expectation is hitting both equities and bonds.

[00:02:17] Sheldon MacDonald: Both of those markets falling more than slightly during the course of the month and last week. Now we have seen inflation and we've been speaking about inflation more in western markets, but we saw last week inflation in Japan rising.

[00:02:31] Nathan Sweeney: Yes, so the Japanese economy is well known for having really low inflation, low prices, consistently low over time, however, we're starting to see inflation increase. So similar to the inflation increases we saw on developed markets last year, we fully expected to see more inflation in emerging markets this year, the reason behind that is because China's reopening is going to boost growth, boost demand, boost economic activity, and with that boost inflation, and Japan is seeing that too.

[00:03:03] Nathan Sweeney: So inflation came in in Japan at 4.2%. Now this isn't obviously as high as in Europe and the US and the UK. However, these are numbers which are tracking up, and therefore the Japanese central bankers are a little bit concerned and trying to keep their bonds pinned at a lower level by intervening in the market and buying bonds.

[00:03:27] Sheldon MacDonald: Let's take a slight detour away from growth and inflation that we've been speaking about for it seems like several months now. Let's look at the ESG side of things. A development last week was quite interesting.

[00:03:38] Nathan Sweeney: Yeah, so there's obviously a lot going on at the ESG front, but we had a group of French NGOs or non-government organizations, which include entities such as Friends of the Earth and Oxfam France and what they're trying to do is bring a lawsuit against one of the big global banks is BMP Paribas, and they're bringing this lawsuit because BMP Paribas is providing finance to oil and gas projects. Now fundamentally, this would be a landmark case if it went through and it would provide problems for oil companies in terms of being able to generate finance to fund projects to extract oil.

[00:04:19] Nathan Sweeney: Fundamentally, if that went through, it could lead to a position where we have less supply because oil has been really underinvested over the last few years, and more demand and therefore creates a structural backdrop where you have higher energy prices and interestingly, a lot of fund managers that we've been meeting recently have been talking about the fact that they do believe that energy prices are likely to be structurally higher.

[00:04:45] Sheldon MacDonald: So on our side, definitely keeping an eye on developments on that front, running out of time, let's quickly take a look at the week ahead. We do have the UK house price index to be released this week expecting slightly more weakness on that front. We did say the turn of the year, we're not expecting a crash, given what's going on with interest rates and so on, we do certainly expect continued weakness on that front. What else are we looking at this week?

[00:05:09] Nathan Sweeney: Inflation data, obviously more inflation data, the big thing in focus, but actually it's Eurozone inflation data. It has been trending down and it's expected to continue to come down, so the reading is expected to come in about 8.2%, we also have unemployment data in Europe, which is expected to stay steady at 6.6%, and we've got earnings.

[00:05:29] Nathan Sweeney: So earnings in the US is coming up to the end of that season, but we do have a couple of big companies yet to report. So this week, the likes of Salesforce, Zoom, HP, Target, Berkshire Hathaway, et cetera.

[00:05:42] Sheldon MacDonald: So loads to keep us interested this week. We hope to speak to you again next week. Thank you.