Logic Monday Espresso Podcast

Monday Espresso Podcast - 9th October 2023

[00:00:00] Nathan Sweeney: It's Monday the 9th of October. Today I'm joined by Scott Truter, Assistant Portfolio Manager and our US Analyst. Good morning Scott.

[00:00:07] Scott Truter: Morning.

[00:00:08] Nathan Sweeney: We'll get some insight from Scott in a second. As always, there's quite a lot happening in markets, so let's dive straight in. Firstly, let's take a quick recap of what was driving markets last week.

[00:00:19] Nathan Sweeney: So if we look at equity markets, it was a mixed week. The UK market was down, it was actually dragged down by the oil price. We've got a lot of oil companies within the UK stock market. Oil was off on the week and that caused the UK market to fall just over a percent last week.

[00:00:36] Nathan Sweeney: But on the flip side of that, we had US stocks which were positive. Tech stocks performing quite well, so seeing some good performance coming through from there. A lot of that driven by expectations for Q3 company earnings. So this is companies reporting their earnings for the last three months and that kicks off this week, so we'll get some insight into that from Scott.

[00:00:58] Nathan Sweeney: And then bonds lagged on the week because of strong economic data. So let's start with that economic data. So Scott, what was the big news item in the US last week?

[00:01:07] Scott Truter: It was the job data for the US so the US labour market resilience continued to dampen the near term prospects of a recession.

[00:01:16] Scott Truter: There was a gain of 336,000 jobs in September. That was the biggest in eight months and it was roughly double the number that most economists had been expecting.

[00:01:28] Scott Truter: In addition, the prior monthly estimates of jobs growth were revised upward and so September's unemployment rate was unchanged at 3. 8%.

[00:01:37] Nathan Sweeney: Okay, so some really strong numbers coming through from the US economy on the jobs front. So that's good for economic growth.

[00:01:45] Nathan Sweeney: Interestingly, one of the figures that I did see there, because they do release quite a lot of figures around jobs data, was wage inflation. We saw that basically wage inflation didn't really budge on the month. So that would be good news for central bankers because it means that actually we're creating jobs in the economy, but we're not seeing that wage inflation coming through.

[00:02:05] Nathan Sweeney: But, that strong economic data is bad for bonds and we saw bonds selling off during the week. So what happens is when bond yields rise, the price falls and we all know that the bond yields rising over the last year was driven by the fact that we've had higher inflation and as a result of that, central banks increasing interest rates and that pushing up bond yields because if you're going to issue a bond you've got to pay more than the prevailing interest rate otherwise nobody's going to buy it, so bond yields higher but interestingly more recently bond yields have continued to move up but what we've seen is inflation is actually falling and central banks have paused raising interest rates.

[00:02:50] Nathan Sweeney: So what's driving this? It's that strong economic data that Scott was talking about, because if you have strong economic data, it opens up the possibility for more rate rises. So ultimately that was the key driver of the bond market last week.

[00:03:06] Nathan Sweeney: But one other reason that people are concerned that central banks might increase interest rates is because we're seeing oil picking back up and that could increase inflation. So what's happening in the oil market, Scott?

[00:03:18] Scott Truter: The oil price closed out the week, $83 a barrel. So the prospects of this lower global demand for petrol weighed on oil prices. It's a 9 percent weekly decline.

[00:03:28] Scott Truter: That's the biggest since March earlier this year. So as recently as September 27th oil was at a high of $94 a barrel. So that's a year to date high. We've seen some increases though this morning due to the conflict between Israel and Palestine, but overall it's still lower than it was a week before.

[00:03:47] Nathan Sweeney: Yes, ultimately if the oil price isn't continuing to rise then there's less likelihood of upward inflationary pressure or inflation coming back.

[00:03:55] Nathan Sweeney: So really I think from our perspective we think that, in the bond market at the moment, there's probably a little bit of an overshoot and people are probably pricing in too much expectation for further interest rate rises. We think that trade's probably gone a little bit too far and we do see value in bonds as of today.

[00:04:14] Nathan Sweeney: But I think importantly, we've got to look forward to what's happening this week. So for the week ahead, what have we got happening this week, Scott?

[00:04:21] Scott Truter: I think one of the big piece of data is US inflation. So that's coming out on Thursday and it will give us an idea of the recently mixed trends in inflation and see if we get a bit of a clearer path ahead from there.

[00:04:33] Scott Truter: In the UK, we've got monthly GDP figures that will come out, and it's expected to show some economic expansion in August. However, there are some industrial and manufacturing outputs that are anticipated to decline for the second month. And then as well in the US, we've got the beginning of Q3 earnings that you mentioned earlier, Nathan.

[00:04:53] Scott Truter: So normally the first ones that come out are banks, and that gives us an initial health check. We've also seen some expectations of the earnings growth come out and when you strip out energy in the US, we may see growth around 5%. This would draw a line in the sand where we've seen some weaker earnings last quarter.

[00:05:10] Scott Truter: Although even last quarter, they were still better than expected. So it'd be another thing to focus on.

[00:05:15] Nathan Sweeney: Okay, so that's quite good news there and so I've seen company earnings turning the corner. So we'll definitely be watching that. So thank you, Scott, that was extremely insightful as always. Thank you all for taking the time to listen.

[00:05:25] Nathan Sweeney: Have a great week and goodbye from me.