Monday Espresso Podcast - 29th August 2023

[00:00:00] Sheldon MacDonald: It's the 29th of August today. The biggest news last week really was the Jackson Hole Conference of Central Bankers, we'll come to that in a second. Let's look at the markets first. Equity markets in the US, fairly positive last week, in particular, the tech sector, and that was led by Nvidia.

[00:00:18] Sheldon MacDonald: Stock delivered blowout earnings performance, and that was up really strongly last week, not to a new high, though, quite interestingly, and on the whole tech stocks in recent weeks have actually been underperforming. We have seen some earnings cuts coming through from some of the analysts there. So an interesting dynamic, but despite that, we did see, as I said, tech stocks or the tech heavy NASDAQ outperforming, that was up around 2% last week versus the Dow Jones, which is more stayed companies, that was only up about a half a percent.

[00:00:52] Sheldon MacDonald: Let's look closer to home though some news on the UK front. I'm joined today by Raj. Raj, what have you got?

[00:00:58] Raj Manon: So last week, Goldman Sachs lowered their forecast for Q3 GDP in the UK from 0.4% to 0.2%. The reason for that being the weaker economic data that we've been seeing.

[00:01:13] Raj Manon: The positive though, is that although the number is lower, it's still positive, so still positive growth for the UK and Q3 being forecast. So some of that weaker data that I mentioned was last week's PMI data. So the PMI is a survey sent out to businesses across the economy. It's useful to the market as it provides up-to-date information on economic activity that's compared to other data points such as GDP data, which tend to be a few months out of date.

[00:01:49] Raj Manon: So the UK's composite PMI came in below expectations and slipped below the key 50 level. That indicates that the economy is in contraction. On the manufacturing side activity continued the trend of being weak and not really a surprise there, but services activity surprised to the downside with a PMI of 48.

[00:02:14] Raj Manon: So earlier this year, the services sector had shown some signs of strength, but with challenging economic conditions and higher borrowing costs, that strength is now fading.

[00:02:27] Sheldon MacDonald: It's quite interesting though because that paints a picture of a weaker economy, but yet last week equities were actually up. Now one of the reasons for that might have been that they were looking at some of the hard data, so not the survey data, but some of that, as you say, potentially older data that did come through.

[00:02:44] Sheldon MacDonald: We've seen growth holding up stronger than expected. We've seen public borrowing expectations lower. We've seen consumer confidence rebounding after taking a hit as rates went up so strongly and we've seen pretty strong wage increases coming through. So a mixed message coming through there and perhaps markets focusing on that.

[00:03:04] Raj Manon: And also with that PMI data signalling contraction, the market will be seeing that as higher interest rates having an effect, having the desired impact on the economy and reducing economic demand, and therefore the market viewing that as less interest rate rises being needed. We are therefore closer to peak interest rates and bonds also gained during last week.

[00:03:34] Sheldon MacDonald: Speaking of bonds, I touched on this earlier, let's speak about what's happening over on the US side. So as I mentioned, we had the Jackson Hole conference. The main speech there that everyone was looking at was Jay Powell, the chairman of the Fed. His message really was one that indicated that rates are going to stay higher for longer.

[00:03:54] Sheldon MacDonald: Some quotes from his, the economy not cooling as expected, and that's on the back of higher consumer spending. The housing sector picking back up, labour market tightness, no longer easing. And really finishing up with a statement to saying they're going to proceed carefully and that they will tighten further or hold rates constant.

[00:04:15] Sheldon MacDonald: So no indication there of when they're going to cut rates. And that led markets to reassess its expectations of when cuts might come through.

[00:04:23] Sheldon MacDonald: Previously about a week ago, there was an 80% chance that the market was pricing in that we would see cuts in the first half of next year. That's back down now all the way to 50 50. That led to some dollar strength and on the back of that, or the, the flip side of that really is sterling weakness.

[00:04:43] Sheldon MacDonald: Let's wrap up quickly, looking slightly further afield in China, we've spoken about the slowdown there for some time now. Slower domestic spending really having an impact now.

[00:04:53] Sheldon MacDonald: There was a rate cut that came through in China, but only a marginal one. 0.1%, not enough to boost confidence there and we saw Chinese markets down about 2%.

[00:05:04] Sheldon MacDonald: And let's quickly look at the week ahead. We do expect the jobs report out of the US that's always very closely watched. We're also expecting an update on Q2 GDP in the US and Euro area inflation. So not much really on the UK side to watch a shortened week.

[00:05:21] Sheldon MacDonald: We look forward to speaking to you again next week.