Logic Monday Espresso Podcast

Monday Espresso Podcast - 04/12/2023

[00:00:00] Nathan Sweeney: Good morning, everybody. It's Monday, the 4th of December.

[00:00:03] Today, I'm joined by Raj Manon. Raj is our Head of MPS and our UK Equity Analyst. Good morning, Raj.

[00:00:09] Raj Manon: Good morning, Nathan.

[00:00:10] Nathan Sweeney: We'll get some insight from Raj in a second, as always, there's quite a lot to talk about. So let's dive in. Firstly, I'm going to take a quick recap of what was driving markets last week.

[00:00:22] Now we've actually had a really good run in equity and bond markets over the last week, and actually over the last month. So we've seen equities and bonds delivering good performance last week.

[00:00:32] We had equities pretty much across the board. So in most developed markets and emerging markets up between 0.5 And 1%.

[00:00:39] So this really builds on the positive momentum we've seen through November, so November has actually been a pretty good month for both equities and bonds. So what's driving that?

[00:00:50] There's a couple of things really, so several reasons why markets have been so good over the course of the last couple of weeks.

[00:00:56] So firstly, inflation is trending lower, secondly, we have central banks keeping rates on hold, so we've seen the end of that interest rates rising cycle. Then lastly, what we're seeing is that despite higher interest rates, the economy has remained pretty strong and actually one other thing to throw in there, corporate earnings have been better than expected, so this really means that there are solid foundations behind the rally that we're seeing.

[00:01:27] So let's take a quick look at inflation first because we did have some inflation figures out last week in Europe, so Raj, what came out on the inflation front in Europe last week?

[00:01:36] Raj Manon: So Eurozone inflation figures surprised to the downside coming in at 2.4% and that was versus an expected 2.7%. That marks the lowest inflation reading for the Euro area since July 2021, that decrease was mainly driven by notable deflation in energy costs and easing price pressures within the services sector.

[00:02:03] Core inflation, which excludes volatile items such as food and energy prices, decreased to 3.6% and that was versus an expected 3.9%.

[00:02:14] So look, inflation is falling everywhere, not just in Europe, and that's a really good thing for markets.

[00:02:21] Nathan Sweeney: Yeah, definitely, so that is really good news to see that inflation coming down, so if inflation continues to come down That means central banks don't need to keep raising interest rates, doesn't it?

[00:02:32] So yes, that's right, Nathan. We had an interesting development last week in the US. So Christopher Waller is one of the governors of the Federal Reserve. He said that the Fed's current monetary policy is currently well positioned to achieve the bank's 2% inflation target, and he also said that if inflation continued to moderate over the next three to five months, they could actually start lowering policy rates or interest rates just because inflation's lower and they wouldn't have to wait for cues from the economy.

[00:03:04] So why is this important? So all of the comments from central bankers so far have been about keeping interest rates high to tackle inflation.

[00:03:13] This is the first time we've heard mention of interest rate cuts and it tells us about the direction of travel and is one of the reasons markets were up last week.

[00:03:23] Okay, so that is really good news because, you know, clearly that's a big change in direction from central bankers. It's only the first comment and it's only one of those board members or one of the governors from the central bankers but it'll give you an indication of what we expect to see unfolding as we move into next year.

[00:03:40] But I think the key thing investors are concerned about is that inflation might shoot back up. Should they be concerned about this?

[00:03:47] Raj Manon: Not if the oil price has anything to do with it. So last week, the oil price was, was flat unchanged in price. So it ended the week at $76 per barrel. And that was despite the news that OPEC oil producers agreed to increase voluntary supply cuts into early 2024.

[00:04:04] That was for a total cut of about 2.2 million barrels per day, this includes an extension of Saudi Arabia's existing 1 million barrels per day and an increase in Russia's export cuts to 500,000 barrels per day. So oil should have gone up in price but it barely budged and this is because we're seeing lower demand.

[00:04:27] So no, there's no need to be concerned about inflation shooting back up at this point.

[00:04:31] Nathan Sweeney: Okay, so that's some really insightful points there we've covered today, so thanks Raj for that.

[00:04:36] Let's take a quick look at the week ahead. So we've got a bit of a lighter calendar in the UK
this week, things i'll be looking out for we've got house price data. I think we've got retail sales and we've got new car sales probably important to keep an eye on that because the retailer Usually drives a large portion of economic growth. And that is the case in the UK and the US.

[00:04:56] Within the US, we've got the jobs report, so you should start to see unemployment ticking up as in less people in the workforce, because ultimately, the economy is softening, but that's not necessarily a bad thing because it means it will help to bring inflation down.

[00:05:12] In China, we've got some trade figures as well out, and again, people will be focusing on that to see is their economy stabilising or not?

[00:05:19] So a lot in there. Hopefully you found that insightful. Thanks for taking the time to listen today, and have a great week.