Marlborough Monday Espresso Podcast - 27th June 2022

[00:00:00] Sheldon MacDonald: It's the 27th of June today, we had a pretty strong market last week, equities and bonds, both doing well, pretty much everything, as it has in the last couple of weeks, revolving around inflation one way or another.

[00:00:13] Sheldon MacDonald: Starting off, closer to home, let's think about the strikes that happened last week, that'll put upward pressure on wages one way or another.

[00:00:21] Sheldon MacDonald: We've also got strikes happening elsewhere or threatened elsewhere. You've got lawyers on strike today and you've got BA ground staff also threatening strikes. So, unions really pushing their agenda in terms of looking for higher wages in the face of rising inflation. Now that would imply inflation sticking around higher for longer.

[00:00:40] Sheldon MacDonald: But on the other hand, we saw some potentially good news on the inflation front last week.

[00:00:44] Nathan Sweeney: Yeah. So, if we look at last week's returns, it was a classic case of bad news is good news. So, let's start with first equity market returns.

[00:00:53] Nathan Sweeney: So, the S&P with some stellar moves there. S&P was up 6.5%. NASDAQ was up 7.5%. The Dow was up 5.4%.

[00:01:01] Nathan Sweeney: So, what's happening here is that we had a lot of data points out, which were actually weaker than expected, which imply that inflation will fall. So, let's break that down a little bit. If we look at some of the housing data that came out. A lot of that housing data was weaker because mortgage rates have been increasing in the US because they're linked to interest rates.

[00:01:22] Nathan Sweeney: So, the idea there is that housing is a big component of inflation data within the US and obviously weaker housing will equal weaker inflation, plus the oil price has been falling for two weeks in a row. So, a couple of weeks ago it was $120 a barrel. It's now $107 and again, that will feed through, into weaker inflation.

[00:01:45] Nathan Sweeney: So bad news for the economy being good news for the stock market, because it means less interest rate rises going forward.

[00:01:53] Sheldon MacDonald: Yeah, speaking about that oil price, down now at $107, remember it peaked a few weeks ago, around $120. So quite a significant shift downwards. Now the narrative there is that the oil price, perhaps coming down because of an anticipation of potential future recession, a recession now openly being discussed.

[00:02:13] Sheldon MacDonald: The view that the interest rate hikes that have happened, the higher, heavier, faster interest rate hikes that we've seen from central banks in the last couple of weeks will create the potential for a recession, but also potentially reducing the maximum level that we're going to reach on interest rates.

[00:02:29] Sheldon MacDonald: But recessionary talks saw bonds perform particularly well last week as well. Particularly long bonds, which are the ones which are most sensitive to those future interest rate changes or the future reductions in inflation, that are starting to be priced in by the bond market. So, bonds, as I say, doing quite well, gilts the 15 year plus duration gilts, up around about 3% last week, so really doing pretty well and this is good news for multi-asset investors.

[00:02:54] Sheldon MacDonald: When you get equities and bonds both doing well at the same time, you do get some strong returns, of course, this is after a good couple of weeks of difficult times, so we're not out of the woods yet. We do still expect some volatility from here.

[00:03:07] Sheldon MacDonald: Moving on there's news, obviously on the political front. We heard last week, the news that Ukraine and Moldova have been given EU candidacy status. Of course, that's not an immediate acceptance into the EU world. Croatia was the last entrant into the EU that took nine years to go from candidacy to full membership.

[00:03:27] Sheldon MacDonald: It is a sign that the European community is still standing behind Ukraine. The G7 meeting happening this week, but the fears are that this becomes a long drawn out, protracted conflict, and that would keep upward pressure on inflation, as we know, significant amounts of wheat and grains and so on coming from Russia and Ukraine. Looking ahead for the week, we've got the OPEC+ meeting, Nathan.

[00:03:52] Nathan Sweeney: Yeah, so OPEC were coming out with production, so how much they expect to produce in terms of oil, and they have been talking about increasing production, so again, this should feed through into a weaker oil prices, so that should definitely help on the inflation front. Speaking of which we actually have some inflation data this week.

[00:04:10] Nathan Sweeney: So, we have got the Fed's or the US Central Bank's preferred measure of inflation, which is called PCE or core PCE and obviously that'll be a closely watched data point to see if in fact inflation pressure is coming off, and obviously that will be interpreted positively by markets if that's the case.

[00:04:32] Sheldon MacDonald: And finally, speaking of central banks, we also have a European forum on central banking, and we'll start to get a view on what the European Central Bank is starting to think. As we know, they've been somewhat behind the curve, they've still not yet raised rates, so waiting to see what they come out with during this week.

[00:04:50] Sheldon MacDonald: So as always lots going on. Lots to watch. Inflation remains at the forefront of everybody's minds. We hope next week we can bring you good news on the market front. As we've done this week, look forward to speaking to you then.

[00:05:03] Nathan Sweeney: Take care.