Monday Espresso Podcast - 30th January 2023

[00:00:00] Sheldon MacDonald: It's the 30th of January already. Can you believe it? A pretty strong week, last week capping off a pretty strong month, a pretty strong start to the year. We had another week when both equities and bonds did pretty well, that initially on the back of some reasonable economic data.

[00:00:17] Nathan Sweeney: Yeah, so a solid week for equities across the board.

[00:00:20] Nathan Sweeney: I suppose the standout for me was the Nasdaq, so tech heavy. Nasdaq was up over 4%, so 4.71%, and that's in US dollar terms. So what was driving that? We had a couple of news points out during the week.

[00:00:32] Nathan Sweeney: Firstly, we had US economic growth. So there's a lot of talk about recession and concerns about a recession, and obviously you need negative economic growth for a recession and we're not seeing that.

[00:00:45] Nathan Sweeney: So if we look at Q4, GDP growth in the US, it came in at 2.9%. So we still got really strong growth coming through, so there is no recession in sight. And then the other piece of good news, we had inflation data.

[00:01:00] Nathan Sweeney: So the Federal Reserve or the Central Bank in the US, they look at a data point called the Personal Consumption Expenditure Price Index, which is just a measure of prices, and they use that to gauge inflation and if you look at that figure for November, it came in at 5.5%, but the reading for December came in at 5%.

[00:01:21] Nathan Sweeney: So you're continuing to see that trending down in inflation and this is good news because it means the expectation around interest rate rises reduces.

[00:01:33] Sheldon MacDonald: One thing though that last year taught us, if we didn't know already, is that the market is not the economy and what the market will focus on will be earnings.

[00:01:41] Sheldon MacDonald: We are deep into the Q4 earnings season at the moment. 29% of companies have reported, 69% of those have been beating expectations. That number, though, that sounds pretty positive. That number though, is running slightly below the average of the number of companies that tend to beat earnings. So earnings are up, but slightly disappointing.

[00:02:03] Sheldon MacDonald: But despite that, actually companies are doing pretty well, share prices are rising, as we mentioned at the start, and that's because it comes back to expectations. Right, so what are expectations for future earnings? And that takes us all the way back to the economy. So how is the economy doing, because that's what ultimately drives company earnings.

[00:02:24] Sheldon MacDonald: Now the positive there is unemployment. We've got unemployment running pretty close to record lows, and that's likely to keep consumption high. Now, this week we do have unemployment numbers due out towards the end of the week, and we'll see what that means for the economy. As I said though, in the meantime, earnings, we've had a couple of strong earnings.

[00:02:45] Sheldon MacDonald: Tesla was the standout last week. Tesla reporting slightly higher revenue and the share price running up about 33% just last week. So some pretty strong reactions to some of the earnings beats that we've seen.

[00:02:58] Nathan Sweeney: Just on unemployment, so there's a lot of concern about the fact that unemployment might rise and obviously that could lead to a recession and what you're seeing in the news at the moment is a lot of tech companies are laying off staff.

[00:03:12] Nathan Sweeney: So that's a big headline and it obviously makes people concerned about the potential for recession if all of these big, high profile companies are laying off staff. But the reality is the tech industry in the US only accounts for 2% of jobs in the US.

[00:03:28] Nathan Sweeney: So even though it's making the headlines, it's not necessarily having an impact, and unemployment is low, and if you have people working, you have people spending, and we would have to see a real tick up in unemployment to get really concerned about a potential recession, and we're not seeing that.

[00:03:44] Sheldon MacDonald: So it seems like the Fed may just be able to pull off that soft landing that we've spoken about, the ability to manage to avoid a recession and yet to keep the economy running without huge job losses.

[00:03:57] Sheldon MacDonald: Now if the economy is relatively better than expected, what are the implications for rates? Well, at the moment, we do have an FOMC meeting this week. We'll see what the latest decision will be. The market is pricing in a pretty much dead certainty that the rate hike will be 25 basis points. We've also got a meeting in March and again, the market is pretty convinced and 84% odds that again, there'll be a 25 basis point hike.

[00:04:23] Sheldon MacDonald: Beyond that gets a little bit more cloudy the May expectation is on a no change in May 57% odds for no change in May. But if the economy is doing pretty well, that might mean that rates stay slightly higher for longer. That rates will plateau at that level as opposed to coming down quickly, and it'll be those expectations or the changes in expectations for rates that we think might drive markets in the weeks and months ahead.

[00:04:49] Sheldon MacDonald: Moving on though from the US, this has been pretty US centric so far, let's think about China. Well, there's a lot going on there at the moment, and this week we get the PMI, the Purchasing Managers Index. Now, this is often the first indication that you get. It's the earliest data point that you get.

[00:05:06] Sheldon MacDonald: It's survey based, so it's based on people's expectations for how things are going to look ahead and so with this PMI it may give us a, a real indication for the first time around how China is dealing with the removal of covid restrictions. So the increase in demand, you know, from the release from lockdowns, but then obviously you've also had the increase in Covid cases. So finely balanced there and we'll watch that PMI with interest.

[00:05:33] Sheldon MacDonald: Other than that, Nathan, what else have we got in the week ahead?

[00:05:36] Nathan Sweeney: Yeah, so the thing to watch out for is central bank meetings. We've got that meeting in the US but we've also got meetings in the UK and Europe where a 50 basis point or half a percent increase is on the cards in both the UK and Europe.

[00:05:51] Sheldon MacDonald: And then we've spoken about earnings.

[00:05:52] Sheldon MacDonald: We're in the depths of earnings season at the moment, some big tech companies coming out this week, Amazon, Apple, Google, Meta, all reporting, and also some of the other stocks, Exxon, Merck, Starbucks, so some pretty big hitters to watch out for.

[00:06:06] Sheldon MacDonald: It remains exciting, as I said at the start. The year has got off to a good start, so let's hope for more of the same.

[00:06:12] Sheldon MacDonald: We'll speak to you next week. Thank you.