Monday Espresso Podcast - 30th May 2023

[00:00:00] Sheldon MacDonald: It is the 30th of May. We had rather a mixed week last week in markets. Let's start off though, with the topic that's really become pretty common for the last 18 months, inflation. So last week in the UK we saw inflation figures, bit of a surprise, Nathan?

[00:00:16] Nathan Sweeney: Yeah. So if we think about inflation data, it's been extremely high, it's started to come down a bit and you know, people were really concerned about the pace of the fall in inflation. It just hasn't been quick enough, but we did see a big move down in inflation and inflation has now gone from 10.1% to 8.7%, but still the market was expecting a bigger fall.

[00:00:38] Nathan Sweeney: We didn't get that. Why not? Food price inflation. So there's been a lot of bad weather around Europe. This has contributed to higher prices for food. You've also had the cost of fertilizers going up because they use energy when producing fertilizer that's used to produce food. Obviously, fertilizer is higher and therefore that's feeding through into food price inflation.

[00:01:00] Nathan Sweeney: So good news in that inflation is falling. Bad news, not quick enough for the market.

[00:01:05] Sheldon MacDonald: Yeah, as you said, core inflation rising. That was in the UK, in the US we also saw PCE, personal Consumption Expenditure, that was also up month on month. So the message is, you know, inflation higher for longer.

[00:01:19] Sheldon MacDonald: What that translated into here in the UK is expectations now that we'll probably see further rate hikes, perhaps up to another 100 basis points. So one full percent of rate hikes and the concerns then that that will feed through to lower growth. So that's saw UK markets weaker last week. More of a positive story though we saw a very positive jump on the tech side in US.

[00:01:44] Nathan Sweeney: Yeah, so we're, you know, coming to the end of reporting season in the US that's companies reporting their earnings for the quarter based off of the last year leading up to quarter end and there's a company in the US called Nvidia.

[00:01:59] Nathan Sweeney: So Nvidia makes chips so microchips, those microchips are used in video game processing units, used in processing units to mine Bitcoin, but they're also used by companies who are basically moving into the AI space, artificial intelligence, because these chips are obviously super chips and they can process quite a lot of data. So they're the best in the market for artificial intelligence.

[00:02:25] Nathan Sweeney: Now the expectation is as AI becomes bigger, the demand for these chips is going to rise, and we're already seeing that. So this company delivered bumper earnings and their share price moved substantially last week.

[00:02:38] Nathan Sweeney: The share price was up 24% in the day. It was the single biggest market cap move for a stock in history. So you saw the stock rising or the market capitalization of that company rising by 148 billion on the day, and then the company also came out and said that they expect their earnings for the next quarter to be even better. So this really did provide a bit of fuel to the market last week in the US and it's good to see that some companies out there are doing quite well.

[00:03:10] Sheldon MacDonald: It is interesting that we've got a dynamic happening at the moment with the rise in tech stocks. The growth in tech stocks, similar to what we saw in 2021, when it was really, you know, the growth in markets there really driven by a concentrated group of stocks.

[00:03:23] Sheldon MacDonald: That has made it pretty difficult for the active equity funds to keep up with the indices. The active equity funds, the non concentration rules, the diversification rules that they have in place, means that they hold a wider spread of stocks. They're not as concentrated as the indices. What that means though is that, perhaps they've missed out till now, but going forward with those growth stocks having run already, there's potentially some catch up for the other stocks to make up some lost ground.

[00:03:51] Sheldon MacDonald: The other positive news we saw in the week was, positive developments on the debt ceiling. So potentially an agreement, at least we've got an agreement between President Biden and the speaker of the house.

[00:04:02] Sheldon MacDonald: What needs to happen now is that that needs to go through Congress. So perhaps not quite the end of the story, but certainly positive moves on that front and so that in counter point to the inflation numbers, this was a positive news story, at least for the bonds market last week.

[00:04:18] Sheldon MacDonald: Let's cast our eyes further afield and some concerns in China. So China was weaker last week. Some growth concerns coming through there on two issues.

[00:04:28] Sheldon MacDonald: Number one is that government stimulus has been pulled back a little, but also that the pent up demand that we hoped to see out of China after their lockdowns as they came out of the pandemic, we expected to see the growth wave like we saw here in the west, but sadly that, that seems also to have fallen off in recent weeks. So negative on the China side. On the other hand though, we saw positive news in India.

[00:04:53] Nathan Sweeney: Well actually, we'll be expecting positive news from India this week because looking out to the week ahead, we do have GDP growth figures for India, and as we know, it's one of the largest economies in the world, and it's growing really fast and expecting to see that economy expand by about 5%.

[00:05:10] Nathan Sweeney: So some good growth coming through there. So that's a nice story.

[00:05:13] Sheldon MacDonald: What else in the week ahead? We've got the jobs report out of the US that's always closely watched. Inevitably, that will lead to further debate on inflation, particularly as we saw last week, the minutes of the previous Fed meeting showing that the governors there, the members of the committee, not quite as unanimous as hoped, so some divided opinions.

[00:05:34] Sheldon MacDonald: And then in the UK we've got house price data coming out. And in the EU inflation figures. So again, further discussion about inflation coming up, as always.

[00:05:45] Sheldon MacDonald: Anyway, lots going on as always, and we look forward to speaking to you again next week.