Logic Monday Espresso Podcast

Monday Espresso Podcast - 5th February 2024

[00:00:00] Sheldon MacDonald: It's the 5th of February today. Another decent week for equities, certainly in the US. I guess here in the UK and Europe, a little more subdued, but we do have record levels in the S&P 500 and in the Dow Jones Index. That really pushed by the news of the week, which was the jobs report. Nathan?

[00:00:19] Nathan Sweeney: Yeah. So last week, that was the big data point we had, which came out on Friday.

[00:00:23] Nathan Sweeney: What it showed is that there's continued strength in the U. S. economy. So unemployment is still quite low with 3.7% and there's lots of companies still hiring. The interesting piece there is around wage inflation. So wages are holding up and are better than expected and are currently running at about four and a half percent. Now the reason why this is quite good news is because it is higher than the current inflation rate. Which means people are being compensated more even in the face of higher prices.

[00:00:55] Nathan Sweeney: But there is some bad news associated with that in terms of when do we get those rate cuts.

[00:01:01] Sheldon MacDonald: Well, let's start with the good news first. So let's stick with that positive real wage growth. That's really positive for companies because it's positive for consumption. Consumption, as we know, driving over two thirds of the U.S. economy.

[00:01:14] Sheldon MacDonald: So people having more money in their pockets to spend, really a good thing and that's what was driving the S&P 500 to that record high that I mentioned. On the other hand, though, that's an uncomfortably high level of wage growth for the Fed.

[00:01:27] Sheldon MacDonald: Jerome Powell, the chairman, he's been on record for many months now saying that we need to get wage growth down, that while wage growth remains high, inflation could remain stubbornly high. As Nathan said, inflation is currently actually in reasonable levels, but the risk is that it gets allowed to bounce upwards again. So, the Fed pushing out expectations for when the first rate cut is going to be. I think markets still expecting four to six rate cuts this year, but whereas they had previously been expecting the first cut in March, that's now been pushed out to perhaps May or even later.

[00:02:03] Nathan Sweeney: So yeah, markets were fully expecting rate cuts to happen in March, but the Fed has always been saying, look, we do expect inflation to moderate over time, so we think we're going to cut interest rates three times this year. So the market is now very much looking towards a May interest rate cut.

[00:02:20] Sheldon MacDonald: Let's turn our attention to earning season. So companies in the middle of the Q4 earning season, about just under half of companies in the US have now reported. 72% of those companies are delivering results ahead of expectations. Now, that's actually fairly normal. Companies do normally beat expectations, but that 72% is slightly higher than the usual average.

[00:02:43] Sheldon MacDonald: So that's fairly positive news. The amount by which they're exceeding is only about two and a half percent. So certainly not staggeringly positive, but certainly a positive at that.

[00:02:53] Nathan Sweeney: If you drill into those numbers, you can actually see some interesting
insights because what we had at the beginning of earnings season was a lot of financial companies reporting and their earnings were a lot worse than expected. So they were expected to deliver earnings down about two percent and they're actually down about 17%.

[00:03:11] Nathan Sweeney: So a big miss there. So what happened there was a lot of these banks have been forced to put money aside by the government essentially to ensure they have money for those deposits which are uninsured because we had a little bit of a banking crisis towards the beginning of last year and so the government is just ensuring that these banks have money, should it be needed by depositors and that's coming through in the earnings.

[00:03:37] Nathan Sweeney: Now Sheldon mentioned those earnings up about 2%, take out those financials, they're actually over seven and a half percent.

[00:03:44] Sheldon MacDonald: We've now had earnings reports from the Magnificent Seven. They are the group of high flying tech stocks. Six out of those seven have beaten expectations, only Tesla lagging behind. So, positive news on the tech front.

[00:03:57] Sheldon MacDonald: As Nathan mentioned, some concerns on the banking front but, importantly, credit spreads, so the price that these banks pay for their bonds hasn't increased. So the bond market, really pretty sanguine about it. And then a final thing to speak about today is the oil price. That was lower, Nathan, despite all these tensions in the Middle East.

[00:04:17] Nathan Sweeney: Yeah, so there's a lot of focus on China at the moment, and will the Chinese economy turn a corner?

[00:04:22] Nathan Sweeney: Now, we've had some stimulus measures out from China, but the market still believes that's not enough. Actually, last week we saw Chinese equities off quite a lot, and this is linked to the movement in the oil price, because generally there's concerns about weakness in that economy, and it is the second largest economy in the world, and a big consumer of oil, and if that economy is continuing to be weak, then that leads to less consumption of oil, which is why we saw a 6 percent fall in the oil price.

[00:04:50] Nathan Sweeney: And you'd expect, why is this happening when you have all of this disruption in the Middle East? It's because there's a firm link between demand and ultimately supply there.

[00:04:59] Sheldon MacDonald: So again, positive news on the inflation front. Let's take a quick look at what's coming out this week.

[00:05:05] Nathan Sweeney: Yes, we've got a couple of data points.

[00:05:06] Nathan Sweeney: So for the UK, we've got house price data. So a lot of people will be focused on that. Interestingly, house prices have actually been rising over the last couple of months and we're expected to see a modest rise in UK house prices. For the Euro area, we have retail sales, which will give us a bit of insight into how consumers are doing in this environment of higher cost, higher inflation.

[00:05:26] Nathan Sweeney: But again, we've got lots of company earnings. We're half way through the earning season, but we've got big companies like Alibaba, Caterpillar, Ford, McDonald's, PayPal, Pinterest, Spotify, Walt Disney reporting this week. So the market will definitely be focused on those.

[00:05:41] Sheldon MacDonald: Lots to look out for and we look forward to speaking to you again next week.